First-party data — the necessary upgrade lenders can’t afford to ignore

A new kind of data, gathered directly from the consumer, is unlocking powerful opportunities for lenders. Andy Moffat unearths the impact it stands to have on credit assessment.

Lenders have long been faced with a paradoxical challenge: how to expand and nurture their business while simultaneously making sound credit decisions that limit their risk.

The historical approach to credit

In the old days, money lenders sat face-to-face with their customers and could examine credit risk and affordability by asking the right questions; there was more to a credit decision than just numbers on a page.

But in the online credit era, the one-to-one connection has been lost, impacting both the lender’s ability to effectively evaluate each consumer, and the consumer’s ability to ‘build their case’ in favour of receiving favourable credit. To operate at scale, lenders must therefore rely on traditional bureau data to understand a consumer’s creditworthiness and affordability. But this data has its limitations, often leading to a higher rate of declines for those who have poor credit histories.

This situation benefits no one: impacting customer acquisition for lenders and leaving many consumers unfairly left out of the credit system altogether.

The new social fabric

5.8 million consumers across the UK are today classified as financially invisible, displaying ‘thin’ or ‘non-existent’ credit files. This makes mainstream financial products, digital services and credit lines increasingly difficult to access.

Typically, those impacted are:

• the young: who have not yet established a credit record
• the old: who may have either paid off their mortgage and have limited use for credit, or who have not previously relied on credit and therefore have no file
• the unbanked: often credit invisible, making it hard or more expensive to obtain finance
• recent immigrants or returning expats: with little or no credit footprint, and therefore struggle to open bank accounts and/or rent property
• those struggling to make ends meet: relying primarily on cash-based transactions.

More of us are self-employed, work on-demand or as contractors. Many are switching jobs and locations frequently, or have multiple income streams. That makes the traditional approach to evaluating creditworthiness a tougher task.

These numbers will rise and the challenge will only increase for lenders who want to remain competitive and innovative within their market. Better credit evaluation must therefore be found in alternative insights that go beyond the traditional data sets previously relied upon — because, it’s only when consumers are seen in three dimensions that lending decisions become clear.

And this is where first-party data comes into play.

The Aire difference: first-party data

Used appropriately, first-party data offers valuable additional insight on an individual’s true level of creditworthiness back to the lender, feeding into existing credit decisioning, in real-time.

By asking deeper questions to their applicants, lenders can complement the historical data they already gather with forward-looking insights, adding greater dimensionality that can improve scoring models to drive smarter lending decisions.

What first-party data tells us:

• financial stability — insights across multiple socio-economic dimensions and changing scenarios
• financial capacity — including current and future financial position, actively serviced debts and timeframes, savings levels, living costs, current and forecasted monetary inflow and financial support
• financial character — such as financial maturity, savings propensity and credit attitude
• macro-financial position — such as employment prospects, career stage and household composition.

At Aire, we then validate this data for accuracy using powerful machine learning technology before returning these insights to lenders in real-time to enable better credit decisions across acquisition, customer management and collections and delivering up to 14% uplift in credit acceptance rates.

The case for adopting alternative data to drive better lending decisions is clear. Ultimately, by asking deeper questions to their applicants, lenders can complement the historical data they already gather with new insights opening up opportunities across the customer lifecycle.

— Andy, on behalf of the team at Aire

Aire provides a range of credit risk and affordability insights to lenders that reveal the bigger picture, enabling lenders to make more informed decisions across the customer lifecycle.

Andy Moffat, Business Development Director, andy.moffat@aire.io