The Past, The Future, and the First-Party Data

Most recent changes within the finance and lending industries can be traced back to one small word: data. Here we discover just why those changes are so important.

Data is the key that unlocks thousands of new possibilities that weren’t previously accessible, for both the lender and consumer.

Sophisticated lenders can now use first-party data to build deeper insights and enable fairer access to credit, without increased risk. How? It comes down to the ability to use different kinds of data to build a more complete profile that historically wasn’t possible.

It’s history: the traditional way to build a credit profile

Traditional lenders build a credit picture around a customer’s financial history. Using the details about someone’s financial past, they generate a credit score to make a final decision about whether or not to include an applicant in their pool of customers.

These details usually consist of:

  • Credit history
  • Amount of money an individual owes
  • The number of new lines of credit an individual has opened
  • The length of an individual’s credit history

Using only traditional information, lenders are sometimes forced to decline marginal and thin-file customers for credit accounts. Without any reassurance about a customer’s future ability to maintain financial stability, it’s just too risky to underwrite them.

Traditional credit profiles are based largely around historical information: what someone has done, what they’ve spent, and historically how they have interacted with traditional lenders.

Some lenders might even currently consider themselves first-party data collectors; for example, if they scrub an individual’s social media profiles during the credit research phase. But at Aire, we see little value in this information. Social media profiles are carefully curated, and retrieved manually, so that it is difficult to gather on a large scale across a broad customer base in a timely fashion.

Of course, in an ideal world, lenders and institutions would have access to more precise methods that would help them expand their approvals and acquire new customers. They would also have a better way to not only look into the past, but also to more accurately predict the future.

After all, certain consumers simply don’t fit the traditional credit assessment model — with new generations increasingly making a living in the gig economy, there are more freelancers, part-time workers, contractors, and self-employed individuals than ever before. With a larger variety of non-traditional jobs and income streams, individual financial profiles are changing alongside the work landscape.

First-party data: what is it?

First-party data provides answers to questions that weren’t previously asked. It’s data that comes directly from the applicant, so it is highly valuable, accurate, and less prone to privacy vulnerabilities. In summary, it’s data provided direct by the consumer.

First-party data can uncover and use unprecedented information as part of the application and assessment process. Information like:

  • Character — how financially mature is an individual? What is their savings propensity? What is their credit attitude?
  • Stability — how stable is an individual across various socioeconomic indicators and dimensions? What does the future hold in terms of their credit longevity?
  • Financial Capacity — What are their actively serviced debts and payoff time frames? What are their living costs? What is their forecasted monetary inflow? What is their forecasted financial support?
  • Macro-financial Position — What are their employment prospects in their industry? What is their career stage? What is their household composition?

The answers to all of these questions helps to build a more complete and forward-looking view of a consumer that allows for the analysis of their character, financial capacity, and forecasted stability.

Namely, first-party data allows for predictive credit and affordability insights on financial character. First-party data is the perfect complement to traditional credit profiling methodologies.

The foreseeable future: enhancing traditional credit profiles with first-party data

Most lenders today still only look at historic data. But, there are new methodologies to combine historic data with first-party data. The overall effect of this combination is not meant to displace the historic credit profile, but instead to enhance it.

How does it work? First-party data is collected digitally and validated at scale, using machine learning algorithms and tools. The incorporation of a more complete data-set can complement the already-existing traditional profile that most banks and lenders rely on.

Average Americans owe 26% of their income to loans, so it’s absolutely vital to create clearer predictions around how consumers will interact with debt. In addition, as the landscape becomes more complex, Americans are losing financial literacy according to some studies. The most effective strategies to support the customer experience will naturally come out of this greater understanding.

Thanks to first-party data, lenders can take a more sophisticated approach to understanding their user base. Using first-party data, lenders can access:

  • A wider audience — access to credit from those who may not previously have been able to obtain it.
  • More personalization — a more holistic picture of which products suit customers of different and diverse financial profiles.
  • Clearer customer profiles — enhanced insights around credit preparedness, income stability, financial maturity, and credit history
  • Smarter red flags — the opportunity to assess and identify red flags earlier on in the lending process, through deeper insights and at-risk signifiers.
  • Faster onboarding — A forward-looking view that helps automate affordability and streamline manual underwriting.
  • Forward-looking credit scoring — future-facing profiles that enable better access to credit
  • A kinder consumer experience — by eliminating administrative redundancies and automating previously-laborious tasks, a gentler, more efficient approach toward consumers.

A new era for lenders and consumers

The rise of FinTech startups and innovative technologies has opened up the doors to a new generation of both lenders and borrowers. According to Experian’s consumer credit survey, 58% of borrowers noted that having the ability to contribute payment history to their credit files makes them feel more empowered, especially when the end result is access to better credit terms. It would follow that creating a more complete, robust, and accurate financial picture empowers both lenders and consumers simultaneously.

Previously, when consumers didn’t fit into the traditional credit assessment model, they were pretty much out of luck. Today, there are better opportunities for lenders to interact with consumers, and support them through a range of different financial circumstances and scenarios.

Consumers are more than willing to provide data that gives them better access to credit, empowers them to skip out on painful bureaucratic form-filling, and restores a sense of control to their financial affairs.

It is up to lenders to reveal the bigger picture of their consumer-base in both traditional and more forward-thinking ways, in order to leverage opportunities in this new era of first-party data.

Aire is a credit assessment service that reveals the bigger picture, enabling lenders to make more informed decisions across the customer lifecycle. If you’re a lender looking to partner with Aire, get in touch with our international team:

We do hard things so people don’t have hard times. And we’re starting by fixing the income ecosystem — for everyone.