American Banker released its “10 Big Ideas for Banking in 2013,” list this week, including ideas like increasing marketing through mobile banking, and putting more effort into avoiding operational risk. One idea in particular that was noted was using non-traditional data to make loans to consumers with little credit history. As the article explained, by appealing to members of the underbanked or unbanked populations, credit unions can find new customers that are qualified but have no way of proving this without traditional credit.
For the 88 million Americans – over 35 percent of the adult population – that have little or no credit history, a loan or credit card could help them build a business or save money. However, with no ability to prove their qualifications, many instead remain underbanked – until recently.
Non-Traditional Data & Lending
While lending to those without credit scores is not necessarily a new idea, many banks backed off after the recession. As financial institutions are warming up to the idea of making loans, more are discovering ways to lend to customers they formerly would have overlooked.
The Central Wisconsin Federal Credit Union uses data from payday lenders to make loans to borrowers with no credit, and allowing them much lower interest rates – and therefore lower default rates – than what payday loans offer. The bank uses data aggregation software to look at borrower’s past payday loans and billing payments to determine if a borrower is qualified.
As the article explained, many of those looking to borrow without strong credit histories are both employed and financially stable, and would benefit from a mortgage or car loan. And as the economy recovers and banks continue to lend more frequently, borrowers who may not have previously qualified may find themselves with more financial options.
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With technology and alternative data, the unbanked population may have more options