Access to credit is part and parcel of life for many, however considerable numbers of people, especially those on a low income, struggle to gain access. Such individuals are financially excluded. Central to meeting this need is providing access to useful and affordable financial products and services that meet the needs of all in society.
Technology can help to address the matter. To gain an insight, Digital Journal spoke with Greg Wright, Chief Product Officer and Executive Vice President at Experian Consumer Information Services.
Digital Journal: Why do so many people continue to struggle to get access to credit?
Greg Wright: The thing about credit is, in order to access it, you have to have it. And our new research, in partnership with Oliver Wyman, found nearly 106 million U.S. consumers are unable to secure credit at mainstream rates either because they are credit invisible, unscoreable by conventional credit scores, or have a subprime or below credit score. That is 42 percent of the U.S. adult population without access to credit.
For people from disadvantaged communities, it’s been even more difficult to enter the credit economy. Many of these consumers have experienced historical credit, wealth and health inequities, ultimately contributing to their underrepresentation in the network of bank branches. In fact, our research showed communities of color are more likely to lack access to mainstream credit, with 28% of Black and 26% of Hispanic consumers unscorable or invisible, which is perpetuating historic disadvantage. But just because consumers from disadvantaged communities don’t have an extensive credit history, doesn’t mean they don’t have a history of making timely payments. These consumers make monthly rent, streaming service, utility and telecom payments; unfortunately, these payments haven’t historically been recognized by the mainstream financial system.
DJ: Has the pandemic made matters worse?
Wright: While the pandemic has certainly been wrought with challenge for many, our data shows that many consumers are handling their credit better than expected. In fact, the average credit scores are at their highest point in more than a decade. That said, we recognize the data doesn’t tell the complete picture.
While many Americans are emerging relatively unscathed from a credit perspective, COVID-19 continues to shine a light on the financial inequities that disadvantaged communities have experienced for decades. According to the Pew Research Center, nearly 60 percent of non-retired, lower-income adults say the pandemic will make it harder for them to achieve long-term financial goals.
As an industry, we have a responsibility to broaden access to fair and affordable credit options; to bring more consumers into the credit economy.
DJ: What can financial institutions do to help close the gap?
Wright: At the end of the day, it comes down to maintaining a commitment to forward-thinking approaches, and never settling for the status quo. There will always be consumers who are new to the credit economy, and we need to continually explore ways to bring them in. Expanded data and advanced analytics can help make this happen.
For instance, while on-time rental payments, and telecom and utility bills have historically gone unrecognized by the mainstream financial system, there’s been a more concerted effort by lenders to incorporate these expanded data sources into the decisioning process. Leveraging expanded data sets like these allows lenders to expand access to credit for currently underserved consumers by increasing the number of consumers they can assess and by improving their ability to identify the true credit quality of borrowers.
DJ: How does data and advanced technologies such as AI play a role?
Wright: The goal for most lenders is to say “yes” to more consumers. More data and advanced technologies allow them to do just that; identify consumers who otherwise would’ve been excluded from the mainstream credit economy and extend credit to them without increasing risk.
Beyond broadening access to fair and affordable credit, relying on process automation can help lenders open more time and resources for areas of the business that need attention.
DJ: What is the credit reporting industry doing to try and drive innovation?
Wright: There’s a notion that the credit reporting industry lags behind others by way of technology, particularly as it relates to financial inclusion. But that couldn’t be further from the truth. Our industry has been the driving force behind innovation, and we’ve made significant progress towards increasing financial inclusion through the use of expanded data sources and advanced analytics.
In addition to incorporating more rental and consumer-permissioned data into the system, we’ve also developed more inclusive credit scoring models, such as Experian Lift Premium, that empower lenders to say “yes” to more prospective borrowers. According to Experian’s research, when advanced analytics and machine learning are combined with expanded data sets as they are with Experian Lift Premium, 96 percent of applicants can be scored, including an estimated 65 percent of the credit invisible population and the entire conventionally unscoreable population. This is significantly greater than the 81 percent of consumers that can be scored by conventional scores. Additionally, 6 million consumers whose conventional scores are subprime could be upgraded to near-prime or above based on the expanded data used in the score.
That said, we recognize there’s more to do. Scoring 100% of Americans and expanding fair access to credit to creditworthy consumers is our goal. We will continue to advocate for more expanded data sources to be routinely used during lending decisions and evolve credit scoring models to be more predictive and inclusive of people from disadvantaged communities.
