Why Alternative Credit Data Matters to Lenders

2020 was a challenging year for many consumers. Jobs were lost, businesses shut down, and everyone was desperately waiting for the COVID-19 pandemic to end. 

But now that 2021 is finally here and people see a light at the end of the tunnel, a whole new market of consumers who were financially harmed by the effects of COVID-19 are looking for alternative ways to gain access to credit.

With many looking to get a fresh start, it's the perfect time to begin using alternative credit scores to expand your range and gain an edge over the competition.

According to a survey conducted by The Federal Deposit Insurance Corporation (FDIC), nearly a quarter of the U.S population are either unbanked or underbanked. This means there are approximately 60 million potential clients!

These clients are often stuck on the end of traditional credit scores, which never give the full story on whether or not someone’s a good credit risk.

But if you use tools like Connect, you will be setting yourself up to successfully expand approvals while managing risks (and you’ll build a new base of grateful repeat customers as an added bonus).

Let's take an in-depth look into what keeps these consumers from using banks and how alternative credit scores can help you say yes when others say no.

Unbanked or Underbanked?

First and foremost, it’s important we clear up what it means to be unbanked vs. underbanked.

Unbanked refers to adults who do not use or don't have access to any traditional financial services. In most cases, the unbanked will automatically turn to alternative banking to cash a check or take out a loan.

Underbanked households have a traditional bank account but will often turn to alternative services to manage their finances due to poor banking options in the consumer's area.

The Cost of Banking

Using a bank has historically been how most U.S consumers save and protect their hard-earned cash. But oftentimes, people who are barely able to make ends meet can't afford to use a bank. 

The number of struggling customers has only increased since the COVID-19 pandemic began.

Below are three of the primary reason's consumers are beginning to look for alternative ways to cash a check or take out a loan:

Minimum Balances

According to another FDIC report, 56 percent of unbanked people were not interested in obtaining a checking or savings account. The reason for this? They didn't have the minimum balance requirement for a bank account.

Aiming to Avoid Fees

A lot of the checking accounts available to people who have weak credit scores will often see a required monthly fee. This additional cost can easily put people over their monthly budget if they are not careful.  

Trust in their Bank

Approximately 30 percent of people who don't use banks attribute it to a strong distrust of financial institutions. This mistrust stems from the lack of transparency and the complicated methods by which they charge people for their services.

Younger Customers are Looking Elsewhere 

Research has found that half of millennials – currently the largest generation in the American workforce—are looking for other ways to manage their finances.

A recent survey found that 68 percent of Americans prefer to use their debit card over their credit card when making everyday purchases.  This means fewer data in traditional credit reports.

New electronic payment platforms have given people a lot more freedom and are building on a long-term trend of consumers shifting away from credit to debit transactions.  In fact, credit cards have been taking a hit for some time in the market.

Additionally, although they are relatively new (compared to paying with a debit card), the ability to send someone money over an app is gaining a huge following.  Applications like Venmo and Cash App allow users to transfer money to others without worrying about going to bank ATMs.

The more people who use methods that don't affect their credit score means that alternative data will continue to play a larger role in how people are approved for loans.

How Can Alternative Credit Scores Put You a Step Above the Competition?

Traditional credit scores are becoming blind to the critical data that is a growing part of risk management.  Using a traditional credit report or score will simply lead to denying many customers who are creditworthy.

Credit reports only take into account four types of credit history. People who have thin credit files or not enough credit history to produce a credit score – approximately 11 percent of U.S adults – will be unable to get a decent loan. 

This number will likely expand as a result of the payment platform trends of younger generations, the economic consequences of COVID-19, and the number of consumers who are looking for new credit relationships outside of traditional banking.

But alternative credit is filling this gap by creating a fairer, more accessible lending system through payment information associated with regular expenses such as phone, internet, utility bills, or even subscription services. 

Using this data will provide a better understanding of an individual’s credit history, so you can make the best decision for you and your business.

Don’t decline credit-worthy clients as a result of the gaps and rigidity of traditional credit scores.  Click here to begin using Connect and grow your customer base today!