By Matt Davies, Chief Commercial Officer, Aire 

Picture someone looking for credit. Someone who has held down a job and contributed to payments during 28 years of marriage, which has now ended in divorce. Looking to rebuild their life and regain their independence, they apply for a loan.

 Denied. Every bill had been in their partner’s name, and their lack of credit history has left them invisible.

This situation is part of a broader trend. More and more life stories aren’t compatible with the traditional methods of credit assessment. For instance, what do the following have in common?

• Young professionals in good jobs who have not borrowed before
• Ambitious recent immigrants looking to get their lives and businesses moving, but who have no financial footprint in the UK
• Reliable older people who paid off their mortgage years earlier?

All three could prove to be excellent customers for lenders, but without a credit history to back them up, how can lenders trust them?

The credit gap

According to Experian, 5.8 million people in the UK (and a further 62 million in the US) are stuck in this credit gap. These ‘thin-file’ customers are almost invisible to the financial system due to a lack of historical credit data. This is unfair. It is also a big missed opportunity for lenders.

Currently, the pressure is on in the consumer lending sector; greater competition and slower growth, combined with mounting  regulatory scrutiny and intervention, has led to lenders tightening their credit criteria. This is making it increasingly challenging to grow credit portfolios sustainably. In the UK, for example, consumer lending growth has fallen back to the lowest level in six years.

We are seeing new sources of competition emerge from a host of fintech lenders offering first-class digital experiences. It is clear that lenders now have to work harder than ever to attract and serve new customers.

In this climate, no responsible lenders should be missing out on growth opportunities by denying credit to deserving customers due to ‘thin-file’ credit data problems. 

Credit data old and new

The problem of thin files stems from the way lenders rely on traditional data sources when carrying out creditworthiness and affordability assessments.

When someone in the UK tries to borrow money, the lender almost always runs a check with a CRA. This lets them see the applicant’s credit history – including applications and credit accounts used in the last six years, and how they’ve been repaid. But what if they don’t have a credit history?

In the past, this wasn’t such a problem. Credit tended to be for major purchases only, and customers would visit the bank when applying. They could speak with the manager and argue their case. Managers were able to learn more about the person’s current situation and make a judgement call.

Although we can’t go back to the time of face-to-face interviews, when there is no credit history on which to base a lending decision, it is not financially viable for the majority of products. We live in a world where most applications are online and consumers of today demand credit decisions in as close to real-time as possible.

The use of historical data from CRAs has accelerated and automated the majority of credit decisions, allowing the benefits to be accessed more widely. Lenders’ reliance on these tools, however, creates a knowledge gap that effectively excludes millions of people without conventional credit histories from the mainstream lending market.

Advances in technology, however,  have made it possible to replicate many of the positive aspects of those face-to-face interactions online, allowing lenders to make fairer and more accurate decisions about all applicants, not only those with conventional credit histories.

The predictive power of first-party data

This is where the potential of first-party data – up-to-date information submitted directly by the consumer about their finances, lifestyle, and career – is moving consumer lending forward.

It allows lenders to see the bigger picture about the applicant, including their ability to afford additional credit, and make responsible decisions based on insights that are as predictive about how someone will perform on their commitments as historical information from CRAs.

Several consumer credit providers in the UK have been trialling enhanced credit risk and affordability assessments from Aire that use first-party data over the last two years. A major online retail group has just become the first lender to deploy Aire at scale across its business to help assess new credit account applications.

Instead of rejecting people or putting them through a lengthy manual underwriting process when an initial credit check returns insufficient data, these lenders invite their ‘thin-file’ and marginal applicants to provide additional information via Aire’s Interactive Virtual Interview.

The online interview appears seamlessly in each lender’s application process and takes around five minutes to complete. Typically, 80-90% of people referred to Aire complete the interview.

Information provided by the consumer is then validated with sophisticated machine-learning algorithms and a vast amount of context data, and used to create forward-looking scores for creditworthiness and affordability. Crucially, the algorithms also look at how people complete the interview, not just what they say, enabling us to spot if people are trying to fool the system.

By using this information alongside traditional bureau data, we can paint a richer picture of an applicant’s lifestyle and financial circumstances.

Using our scores, lenders can accurately assess creditworthiness and make automated decisions for millions of people they couldn’t have served before. This is great for business, allowing lenders to offer credit to 12-14% more applicants without increasing their marketing spend, appetite for risk, or default rates.

Insights from Aire are also used later in the credit lifecycle to help inform lending decisions about existing customers and engage more appropriately with customers that have fallen into arrears. Aire has helped lenders apply their collections resources more effectively and accelerate the recovery of outstanding credit by 25% with no increase in referrals to debt-collection agencies.

Putting the consumer in control

How lenders assess credit applications has changed little over the last 30 years, in part because historical credit information shared by CRAs remains an incredibly useful way of determining risk for most consumers.

What works for most consumers, however, excludes large sections of society from mainstream financial services. Given the competitive pressures we see today, there is a tremendous amount of potential for mainstream lenders that can understand these new potential customers as individuals and serve them fairly and responsibly.

By putting the consumer in control of their data, Aire is helping to ensure that all consumers, whatever their circumstances or prior use of credit, can be assessed fairly, accurately, and on merit. Our approach helps lenders do the right thing for their customers, allowing them to meet their regulatory requirements and grow their portfolios by ensuring that more borrowers get credit where it’s due.