How digital finance is changing the credit game in the Covid-19 era
According to National Fidelity Information Services (FIS), there was a 200% jump in new mobile banking enrollments in early April 2020 and an 85% increase in mobile banking traffic. Deloitte reported that online banking activity has grown by 35% since the start of the pandemic. These trends only increased and to the right as the global health crisis persisted.
Banking activity aside, the economic fallout from the pandemic has been disparate. Many are struggling financially, while a significant minority likely found themselves with higher disposable income than before the pandemic, thanks to the stimulus measures. Despite the overall economic decline, the average credit score in the United States climbed 1% (seven points) in 2020, reaching a record high of 710, according to Experian data for the third quarter of 2020. Relative to growth average observed over the last ten years. years, the increase in 2020 was unusually high.
Cory Ayres, Vice President of Experian Partner Solutions, shared his opinion:
“The pandemic has had a different impact on the demand for credit depending on the product. While aggregate demand is down when indexed to 2019, auto and mortgage demand has been strong throughout 2020 and begins 2021 above our 2019 benchmark. banking and personal loans have remained on the decline throughout 2020 and the first month of 2021, both show an upward trend. ”
Ayres believes strong demand for cars and housing, along with the nearly $ 2 trillion stimulus, will continue to drive overall market activity, as well as demand for credit, to 2019 levels and beyond. As further evidence, overall creations have started to rebound to 2019 levels, with bank cards and personal loans seeing notable gains in the final months of 2020.
Despite this somewhat surprising rise in credit scores, many of them still suffered. With many Americans already facing job losses and economic insecurity during the pandemic, reports of credit report errors have also increased. Complaints to the Consumer Financial Protection Bureau about credit report errors have reached record levels, according to the US Public Interest Research Group, a political and consumer advocacy organization. Much of this was due to confusion surrounding the CARES Act legislation, which allowed for deferred payments, mortgage protection and other measures, which were then falsely flagged as late.
Andreessen Horowitz estimates that businesses of all kinds are experiencing at least two years of digitization compressed into months in the early months of the pandemic. Innovation was not just necessary; it was urgent. FIs and Fintechs had to do everything at the same time instead of building products on top of each other (this is the practice with traditional roadmaps). From mobile offerings to call centers, FIs have had to scramble to deliver more robust digital products in a short time to maintain a competitive advantage as consumers migrate rapidly to digital banking.
Financial innovation squeezed during Covid 19 should be music to commercial and retail lenders. Digital technologies brought by fintechs, APIs, mobility, artificial intelligence, big data analytics and more enable traditional lenders to deliver hyper-relevant lending experiences with optimized data-driven insights. Consumers benefit from faster, often paperless, online creations, decision making and processing. During the pandemic, Authenticate, a remote online notarization provider, reported a 263% growth in retail transactions between consumers and notaries and an 826% growth in its real estate business, illustrating a digital migration across the board.
Other notable trends affecting credit during the pandemic include the shift from cash to digital payments, fintechs that don’t offer credit check loans, myriads of payment options, and other ways to pay. ” get goods and services without affecting credit scores. All of this concludes that many of the traditional data entries that previously informed credit underwriting models may no longer paint the full picture of a consumer.
Like many financial services, the credit industry has historically been slow to adopt new technology or innovate beyond the traditional FICO score, primarily due to complex legacy systems and the regulatory oversight that goes with it. However, to compete with fintechs, credit bureaus need to innovate to stay relevant.
Last week I sat on a panel at the Lendit Fintech Conference with Cory Ayres (cited above) to discuss these trends. We explained in more detail how Experian, often seen as a conservative and old-fashioned company, approaches the fintech world and keeps innovation alive. Ayres leads sales for Experian Partner Solutions, who comes from the world of venture capital-backed startups. The company was born from the combination of Experian Affinity Services and CSID, an Austin, TX-based credit data and identity management solutions startup that was acquired by Experian in 2016. He explained that Experian Affinity Services’ history in tech startups has enabled it company to innovate beyond the traditional constraints of the industry. “Disruption and innovation are in our DNA, and we’re applying it to a legacy industry,” Ayres said. “As such, we can create opportunities for our partners by enabling them to offer services that engage, retain and monetize customers.”
The company helps create better outcomes for consumers by providing comprehensive identity protection technologies and services. Experian as a whole now offers consumer fintech products that challenge the traditional notion of credit bureau. Of the society To reinforce product and some white label products for companies like Chase demonstrate that a traditional industry can innovate.
The squeeze on the tech roadmap was rampant in the first half of the pandemic. Meanwhile, the demand for credit is on the rise and consumers will expect the technological and process changes that have improved the customer experience to hold up and improve. This precipitous horizontal expansion must also guarantee financial security and education. Financial literacy – not only about your credit score, but also how to sustain yourself through savings, investments, and other tools – is essential to re-enter a post-pandemic world.
As consumers and lenders grapple with this, Ayres also has her eye on a post-pandemic recovery for SMEs, which, along with consumers, will also reenter the market. He stressed the importance of telling potential clients “not yet, but soon” instead of declining loan requests. “With credit education and a commitment to financial health, in a few months this customer can now be purchased,” Cory explained.
For lenders, this means looking at portfolios from a new perspective – assessing exposure from the health crisis and whether lending models and criteria will work adequately to help meet lending goals after the recovery. Alternative data, such as education, employment and rental longevity, spending and savings behaviors, all support the ability to see a client’s entire loan portfolio and to propose strategies for more robust decision.
Innovation and competition will always be at the service of the end consumer. Reached, an AI lending platform, seeks to improve access to credit by examining factors beyond the FICO score. These include things like credit experience, work history, education history, and more. The company looks at over 1,000 variables for each loan seeker, which it says offers 4-8 times more accuracy than a traditional lending model, meaning it can approve more loans while lowering the costs. borrower default rate.
Buy Now Pay Later (BNPL) is another industry that bypasses traditional credit rating and thrives. Even in the subprime market, companies like Katapult, a BNPL-type leasing model, achieve extraordinary results on repayment performance using alternative loan data. However, for many large purchases such as a high value house, car or boat, the FICO score remains king.
According to Ayres, the credit bureaus are certainly looking at what can be added to the credit score tabulation algorithm to provide the most accurate risk assessment for lenders, as well as the best rates and products for consumers and consumers. SMEs.
There is indeed a scenario where everyone wins, but it will take work to get there.
Disclosure: Moor Insights & Strategy, like all research and analysis companies, provides or has provided paid research, analysis, advice, or advice to many high-tech companies in the industry. The author does not hold any investment position in any of the companies cited in this article.