Friday, August 3, 2007
VIEWPOINTS
Credit Insight from
By THOMAS C. BROWN
Nontraditional Data
To achieve growth, lenders must always
be on the lookout for new, creditworthy
customers, but this process has become
increasingly difficult in a competitive mar-
ket with an oversaturated customer base.
Make no mistake — the pool of potential
borrowers is shrinking. There is an urgent
need to consider emerging, nontraditional
technologies to facilitate growth.
More than 75% of Americans have credit
cards, with the average cardholder carrying
nine. Nearly half of cardholders maintain a
balance on their accounts and usually carry
even larger debt loads for their cars, homes,
and education.
In addition, most consumers receive up
to 30 credit card solicitations annually. Stu-
dents are becoming cardholders at an early
age — 83% of undergraduates have at least
one card, with 32% having four or more.
By the time they graduate, tomorrow’s buy-
ers will have tripled the number of cards
in their wallets and doubled their average
card balance.
The median number of bank cards per
person is two, and the median credit limit
is $13,500. Total household debt, includ-
ing mortgage, now reaches nearly 100% of
most consumers’ post-tax annual income.
With credit debt at this level, where is
the room for growth? Where can lenders
look to find new sources of revenue and
cultivate borrowers?
Lenders must shift their focus to the
25% of people who have traditionally relied
on cash. This group includes immigrants,
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young people new to credit, and those with
a cultural bias against credit. This is where
the growth potential lies.
These markets offer a vast sea of
untapped, creditworthy individuals whose
“thin” history makes it difficult for them
to obtain credit. The challenge for lenders
becomes how to tap this revenue source
with fiscal assurance.
Traditionally, banks and credit card com-
panies have been forced to rely on evalua-
tions of a consumer’s credit history, usually
proffered by one of the major reporting
agencies. This method determines cred-
itworthiness by looking at such factors as
whether bills are paid on time, the debt
carried, the amount of credit available, the
debt-to-income ratio, etc.
But in today’s competitive climate, this
method falls short. Not every consumer
has a robust credit history, and some his-
tories do not reflect true creditworthiness,
because they do not take into consideration,
for example, life-changing circumstances.
To supplement traditional credit-scoring
methods, lenders should consider technol-
ogy to target applicants who may have been
rejected by previous scoring methods.
Nontraditional credit scoring relies on
a detailed analysis of positive and deroga-
tory life events, evidence of assets and
address stability, positive identity verifica-
tion, and public records like employment
and marital histories.
These noncredit sources record infor-
mation that is analogous to a traditional
credit history, providing relevant insight
about an individual’s economic lifestyle. This
approach can help lenders predict future
behavior and identify new borrowers.
For an applicant with a thin credit his-
tory, stable addresses with phone listings are
evidence of responsible housing and utility
payments. Credit bureaus typically do not
record such payments, but nontraditional
data sources do.
Consider the wireless phone industry,
which uses traditional credit scoring yet
experiences higher-than-usual delinquen-
cies and risk. Of 100,000 new telecom cus-
tomers who were followed for 18 months,
19% were delinquent. The losses incurred
in this industry can be substantially reduced
if poor-risk customers — those scoring low
by nontraditional scoring methods — are
required to make an up-front deposit.
Traditional scoring methods rely exclu-
sively on past credit management. This
approach significantly limits lenders’
growth potential. The alternative — using
nontraditional data instead of credit his-
tory — will enable creditors to capitalize
on the expansive market of nontraditional
credit seekers.
There is room for growth in this market,
with the use of out-of-the-box thinking and
modern scoring technologies.
Mr. Brown is the vice president of financial services
solutions at LexisNexis Risk and Information Analytics
Group, a Boca Raton, Fla., division of Reed Elsevier PLC.