Four Reasons Why Traditional Credit Data Falls Flat Post-Pandemic

2020 and the COVID pandemic brought a lot of surprises, changes, and challenges for businesses.

One of the biggest surprises was the change in consumer behavior. Many of the changes in consumer behavior will be momentary and others will affect the way consumers behave for years to come. These changes have important implications for all businesses, especially for FinTechs and traditional financial service providers. Now more than ever is the time to utilize more comprehensive credit data solutions.

1: Current Financial Landscape

FinTechs rely on having clear insight into a consumer’s financial patterns and behaviors.  Traditionally, determining creditworthiness relied upon a credit report from the bureaus.  Credit bureaus track consumers’ open and closed accounts, debt balances, credit limits, credit inquiries, collection items, and public records.  Now insert the fourth round of stimulus checks, $1000 bonus checks for educators, child tax credits, and extended local or state unemployment benefits.  These events flip the traditional credit bureau reports on their heads.

Stimulus checks have given consumers the opportunity to pay off debt balances.  Extended unemployment benefits have allowed many to postpone returning to work.   Some consumers used the pandemic as an opportunity to go back to school.   Shopping shifted from brick and mortar to eCommerce and spending on entertainment skyrockets as we return to pre-pandemic life. The federal eviction moratorium has expired, and legislators may issue aid to those forced to move out of their homes.  While some benefits seem like they will continue, others appear to be coming to an end. 

2: Inefficacy of Legacy Credit Reports

We are in another transition period continuing to make the future of predicting consumer behavior unpredictable. Fintech and lenders that use this transition period to rethink consumer behaviors can adapt, right-sizing their credit decisions.   Still while keeping an eye on many longer-term changes that are being formed and will ultimately shape the next transition in consumer behavior.

Legacy credit reports are effective in assessing normal pre-pandemic, long-term, life events.  They do not always paint the clearest picture of a consumer’s short-term financial patterns and behaviors in the circumstances we have now.   With massive stimulus and benefit programs, changes in underlying shopping behaviors, lenders and financial service providers require more robust information.

3: Identify Complex Behaviors

Many lenders and financial service providers are turning to banking and payment data to detect the changes and anomalies to a consumer’s financial patterns and behaviors. By leveraging machine learning and detailed payment transaction information we can identify more complex events, like the impact on consumers from stimulus and benefit programs, with greater accuracy. We can also more accurately reveal income and spending and be more predictive of future payment behavior since banking and payment data is more reactive to sudden financial and economic changes.

4: Create Better Customer Experiences

Banking and payment data provide immense value for financial institutions and fintech companies to serve their customers better.  But not all banking and payment data are the same. Some banking and payment data come through bank account aggregation technologies. Other banking and payment data come through database contributions from financial institutions and businesses. 

Bank and Payment Database vs Bank Aggregation

To unlock the full potential of banking and payment data one must understand the effort to integrate, the impact on digital experiences for consumers, and the type of data you will receive.  For example, on average, consumers have nearly five accounts spread across multiple institutions or organizations. If you were to get a complete picture of all accounts using a bank aggregation technology it will require a consumer to log into multiple financial institutions, which is likely not a viable option given the amount of time and effort it imposes.  Effectively erasing any semblance of a friendly online experience for the consumer.   

However, a banking and payment database solution requires no interaction on the part of the consumer and will often return information on more than one bank account the consumer uses.  On the other hand, bank aggregation will sometimes reveal the direct deposit information from the consumer’s employment.  Whereas the banking and payment database service will not.  The bank aggregation solution will often present issues with normalizing the transaction descriptions from the bank accounts. Comparatively, the banking and payment database solution will provide normalized, structured, and pre-calculated attributes making it overall, an easier solution for risk management teams.

Understanding & Utilizing Alternative Credit Data Resources

Whichever solution a fintech or financial service provider chooses, banking and payment data allow for a better understanding of a consumer’s financial patterns and behaviors. In this time of consumer behavior transitioning, it is more important that Fintech and financial service providers incorporate banking and payment data into their creditworthiness assessments of consumers.  The banking and payment data is simply more reactive to sudden changes and more descriptive of a consumer’s ability and willingness to pay. 

ValidiFI is the leading provider of banking and payment data solutions, including our Bank Aggregation technology. Our team is equipped to help you identify the tools and strategies to help your business succeed. Call us today at 844-562-6678 or email us to get started today.