The problem of financial inclusion is an acute one in the United States. The Office of the Comptroller of the Currency has said that nearly 50 million Americans have no credit score. And without those scores, it’s tough to get a loan. Without a loan, paradoxically, it’s tough to get that credit score.
Early Warning Chief Analytics Officer Ravi Loganathan said that financial inclusion could be improved through greater access to credit and capital and joint efforts between the public and private sectors. To get there, we’ll see advanced technologies emerge, along with a shifting mindset among regulators and lenders as to what data is useful in gauging risk.
As Loganathan told PYMNTS, financial inclusion is a “complex topic that both impacts the consumer as well as companies that are providing services.”
The pandemic spotlighted the glaring economic inequalities between those who have credit access and those who don’t. It’s a timely subject to tackle as the technological tools needed to level the playing field are increasingly available as much economic activity moves online. He noted that “the trend certainly is towards technology, data and new solutions from an analytic standpoint. This opens the door to strategically look at data that opens more doors to credit.”
The regulatory environment, he said, is changing, too. Regulators are more inclined to look at alternative data beyond the sources that have historically been used to provide visibility into responsible financial behavior.
As to just what those alternative sources might include: Financial institutions (FIs) and FinTechs both are increasingly enabling would-be lenders to take deep dives into checking and deposit account activity, where “you can definitely understand consumers’ overall balance sheets, both inflows and outflows.” Having data that can show consumers are paying their rent and utility bills on time provides would-be lenders with proof of on-time payments not captured by the more traditional reporting bureaus.
He pointed to Project REACh — short for Roundtable for Economic Access and Change — as promoted by the OCC, which brings together leaders from banking, business (including Early Warning), and national civil rights organizations to improve financial inclusion. Its goals include establishing an alternative credit scoring method to include cash flow data to assist underwriting and boosting access to credit and capital for individuals and small and minority-owned businesses. He noted that to date, more than 115 organizations had joined the project.
Alternative Credit Assessment
As Loganathan said, “the alternative credit assessment utility work stream is a great example of government and the private sector working together to come up with alternative solutions.” Early Warning, he said, has been developing a solution that provides data that may not be held by the traditional credit bureaus — with insight into deposit accounts and utility payments.
With a wealth of alternative data to be collected and examined to establish creditworthiness, he said, more granular information “certainly has a positive impact on those financial institutions” who want to extend access to credit, he said. “There’s this domino effect of expanding the credit ‘box’ to include more consumers, companies and their respective communities.”
See also: Customer Relationships At The Center Of Financial Services Transformation
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