Wondering where to find growth in a crowded industry, and reach a customer base you don’t have to pry from your competitors’ hands?
The Credit Invisible Segment
There are millions of “credit invisible” or no-hit/thin-file customers who have a clear need for various financial products. Whether they are immigrants, young adults, low income individuals, or those that have simply never developed a credit history, this is a huge population that is, by definition, underserved and hungry for financial products, and represents an immense opportunity for growth.
- Immigration and the thin-file/no-file market are the greatest potential for growth in mature markets such as Canada and the U.S.
- More and more solutions such as global credit bureau reports, alternative data, cash flow analysis, and improved machine learning are being developed to solve the “thin-file” problem
- The majority of lenders already utilize alternative data, but there are still challenges to effectively and optimally deploying these technologies
Looking at Canada specifically, immigration is expected to be the main source of growth for the economy and population. The federal government just recently committed to holding immigration levels at half a million starting in 2025 and for the foreseeable future. When someone immigrates to a new country, they need a whole slate of new financial products, and in a moment of profound change for immigrants, this is one of those “moments that matter”. It is a great opportunity to make a strong first impression and build lasting loyalty.
Immigrants who have spent less than 2 years in Canada, compared to Canadian-born citizens, are 3x less likely to have a car loan, 4x less likely to have a mortgage, and 5x less likely to have other lines of credit. (Stats Canada, 2023)
This isn’t just a solution for immigrants, either. The U.S. has 50-60 million consumers that are “credit invisible”, and certain minorities or segments disproportionately make up this population. Developing solutions to serve the new-to-credit market can help level the playing field and increase credit availability.
With the use of rental payment data in the mortgage credit evaluation process, “Fannie Mae estimated that about 17% of first-time homebuyers who were initially ineligible would have been approved”. (Urban Institute, 2022)
The Customer Experience
Many lenders don’t have infrastructure that is well designed to serve new-to-credit consumers, just because they don’t have a rich credit history. Those that are able to access credit are forced to navigate a fragmented market, go through a tedious (usually manual, in-person) process to get approved, and receive lower lines and higher rates than their more established counterparts.
Getting it right presents a chance to be the first brand to engage with a captive segment, build memorable relationships that secure long term growth, increase retention, and drive higher customer lifetime values through up-selling and cross-selling.
“Loyal customers recommend their bank up to 6x more, are less likely to switch to a competitor, and spend 25% more (on average) on their credit cards.” (Bain, 2019)
“Increasing customer retention rates by 5% increases profits by 25% to 95%.” (HBS, 2000)
Latest Solutions to Thin-File Underwriting
Today we’re seeing a shift in the market, with lenders increasingly adopting technologies that better fulfill the needs of New-to-Credit customers. Some of the new solutions being employed include:
- Alternative data such as utilities and bill payments, rent payments, user-permissioned cash-flow, transaction, and asset data, as well as education profiles is used to forecast credit risk
- Aggregation of cross-border credit bureau data to utilize immigrants’ existing credit histories
- Inclusion of data on alternative lending products such as Buy Now, Pay Later loans
- Trended credit bureau data to infer behavioural shifts rather than static views of historical behaviour
- OCR document verification and electronic KYC/AML verification, which enables a fully digital onboarding experience, and allows prospects to get the application process rolling before arriving in a new country
Fintechs and neo-banks have led the charge using these new innovations, but traditional lenders are starting to catch up. According to Nova Credit's report, 59% of lenders currently use various forms of alternative data in their underwriting process.
Questions to Ask
Before implementing the solutions mentioned, there are a few important questions to consider:
Regulatory / Consumer Protection: Without clear regulatory guidance on the ethical use of alternative data, how can we ensure we’re managing risk and complying with fair lending and consumer protection laws? Do we have the proper data security and privacy policies to protect the highly sensitive data we’d be bringing into the fold?
Feasibility: Given the nature of how user-permissioned data could introduce biases, as well as the immaturity of these solutions and datasets, how do we build confidence that long-term risk predictions are accurate and monitor that they continue to be? Is the data coming from multitudes of data providers reliable and stable enough to be a key part of the underwriting process?
Implementation: Is the data coming from disparate sources such as cross-border credit bureaus, or simply from bank-to-bank standardized, and if not, how much complexity and maintenance is required to make the data usable? Once the data is cleaned up, how much investment in technology and infrastructure is required? Does it fit within our existing tech stack? Lastly, how do we effectively integrate alternative data into our credit decisioning and policies?
At Payson Solutions, we specialize in delivering bespoke data solutions to help lenders grow their business. If you would like to learn more or discuss your opportunities to serve the new-to-credit segment, drop us a line and we would be happy to chat!
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