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The increasing prevalence of consumer-permissioned data in the U.S. is poised to reshape the credit landscape significantly. This shift is fostering the emergence of new business models for entities that serve as “connectors” and “collectors” of this data, which includes detailed bank account information that enables lenders to better assess creditworthiness.
These intermediaries, which bridge the gap between consumers’ financial data and lenders seeking comprehensive insights into their potential borrowers’ creditworthiness, are capitalizing on this data. The information spans various payment types, such as rent, mobile phone bills, and utilities, creating new avenues for monetization.
Recent developments highlight how platforms and established financial service providers, particularly credit reporting agencies, are recognizing the value in aggregating and repackaging this information. This approach aids lenders, including digital-first entities and traditional banks, in refining their credit assessment processes, addressing deficiencies in traditional models.
Limitations of Traditional Credit Scoring
Only 22% of consumers living paycheck-to-paycheck with bill payment issues have secure access to credit. This statistic underscores the potential for alternative data to provide a more holistic view of individuals’ financial capabilities, encouraging lenders to adopt new methods.
Consumers marginalized by traditional credit systems are more than twice as likely to rely on high-interest loans during financial crises compared to their credit-secure counterparts.
In response to these challenges, FinTech company Plaid, known for connecting bank account holders with a range of apps, launched its own Consumer Reporting Agency (CRA) last year. The CRA aims to provide FinTech’s enterprise customers with ready-made credit risk insights derived from consumer-permissioned cash flow data.
This week, Plaid introduced a new credit underwriting solution, Consumer Report, which utilizes bank account-level data to enhance client firms’ credit models. Early adopters include online lenders like Oportun, which serves individuals with limited or no credit history, and approximately a dozen other firms.
Plaid’s consumer-permissioned data encompasses various metrics, including savings account activity, gross income, and debt-to-income ratios. By leveraging this data and advanced analytics, client firms can generate more accurate credit scores through the Consumer Report offering.
Expanding Use of Alternative Data
Credit reporting agencies are also exploring alternative data streams. Equifax’s Alternative Data initiative uses consumer-permissioned, account-level information to gain a broader understanding of consumers’ creditworthiness. Additionally, digital bank Dave provides cash advances and debit cards based on cash flow data from numerous transactions.
Last month, VantageScore unveiled a new credit-scoring model that integrates traditional credit data with alternative open banking data. This hybrid model offers lenders a predictive lift of up to 10% compared to the VantageScore 4.0 credit score, enhancing its utility for banks and FinTechs.
The rise of consumer-permissioned data is not only transforming how creditworthiness is assessed but also paving the way for innovative financial services that can better serve the diverse needs of consumers and businesses alike.
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