Innovation as it relates to lending can take many forms. For one, quicker, more efficiently deployed products can improve the borrowing experience. For another, extending the availability and access to loan products across disparate populations can improve financial lives.
The second day of the 2018 LendIt Fintech conference provided insight into financial inclusion and relationship building. Here are two takeaways from the second day of the conference.
Let The Bakers Bake
One of the mottos that Kabbage lives by, according to its CEO and co-founder Rob Frohwein, is to let the bakers bake.
As a company that provides funding to small businesses, the utility of these words is obvious: small businesses owners should be able to focus on their craft and not stuck deciphering their finances.
To successfully implement this vision requires strong relationships between the lender and its customers a level of trust. Relationships, however, are difficult to grow. But not impossible.
Do you have implicit permission from the customer to make additional financial offers? he asks. You do if you have a relationship.
But what suggests implicit permission? And, with that, how lenders further deepen and grow relationships?
This implicit permission exists when customers are genuinely curious, excited, and open to trying new products and services based on their pre-existing experience with your company and your competitors, he says. Consider the fanfare that exists whenever Amazon does anything.
Not every company is Amazon, of course, so Frowein offers three ingredients to expand offerings and grow relationships:
- Proximity: How far is your next product from your last product? Great companies build brands and then extend them in a natural order. Think Tesla producing powerful batteries, not Cheetos introducing lip balm.
- Knowledge: How well do you know your customers? And how current is that information? The best answers to these questions, he says, are Very well and always.
- Engagement: Consider the frequency and depth of your customer interactions: if you are not interacting with them often, they are not thinking about you often.
Promoting Inclusion Through Alternative Data
There are 53 million Americans without a FICO score, says vice president of scores Sally Taylor-Shoff. These individuals fall into three buckets: credit retired (those 71 years-old and over, who typically have no need for credit), those who had derogatory marks on their reports and stopped using, and those new to credit (whether young people or immigrants).
Without a FICO score, how can these individuals get access to the loan products they need?
In April 2016, FICO introduced its FICO Score XD, specifically designed to provide a reliable credit score for consumers previously unscorable based on their traditional credit profile. Then in late March 2018, FICO released XD 2.
Through this score, FICO has been able to tap into 72% of the 53 million Americans without a traditional FICO score, says Taylor-Shoff.
How? FICO culls alternative data source to make credit judgments, and it does so in three ways: from consumer reporting agencies (CRAs), monetized consumer data sources, and the consumers themselves.
For example, FICO will see how a potential borrower typically pays their rent or phone bills, even when and how they email and text their friends and family: do they send messages first? Wait for messages and reply? How many friends do they have?
When there’s no traditional financial information available, FICO has to find creative ways to measure worthiness.
But wait. What does email or text habits teach FICO about a borrowers ability to repay? Well, according to Taylor-Shoff, FICO uses this social information to see how the borrower compares to traditionally scored borrowers. Those who exhibit similar social behaviors can share financial behaviors, too.
Not all data is created the same, however. There is a clear hierarchy in how sources of data work to predict borrower risk. The best predictor, according to Taylor-Shoff, is financial account data. The second is bill payment data. And the third is non-financial data.
Because those who don’t have FICO scores also do not have financial account data, XD 2 relies on alternative, non-financial data sources. And when it comes to those sources of data, FICO has a 6-point test to determine the validity of the information:
- Scope and consistency
- Depth and breadth
- Additive value
And while data limitations can exist across FICO’s non-financial sources of data, thus still keeping a universal predictive FICO scores something to which to aspire, FICO has allowed millions access to traditional financial services.