The banking transaction data available through open banking offers a powerful add-on to credit reporting data and internal credit scores, giving lenders greater confidence when assessing loan applications from “credit immature” borrowers.
This is the key finding of an illion study of how Australian consumers with little or no credit profile are dealt with by lenders. illion sells credit reports and has an open banking product called illion Transaction Risk Score.
The paper, Banking Transaction Behaviour, said consumers with minimal credit experience have traditionally found it more difficult to obtain mainstream credit than their “credit mature” counterparts. They are often forced to access credit at a significantly higher cost.
Around 20 per cent of Australian consumers who apply for credit from a mainstream lender have a “very limited visible credit profile”. Lenders have little access to a credit history when assessing their credit application.
The credit approval rate for this group is typically 20 to 50 per cent lower than that of the “credit experienced” population, depending on the lending sector and the lender’s access to alternative consumer information.
illion found that lenders with greater access to banking transaction data appear to discriminate far less against the “credit immature” or the underbanked.
illion’s definition of underbanked consumers includes young people with no credit history, people re-entering the credit market after a long hiatus, and people with low socio-economic status.
The proportion of credit card applicants on the illion credit bureau who have no other credit relationship is 16 per cent for the big banks, 10 per cent for foreign-owned and regional banks, 27 per cent for prime non-bank lenders and 18 per cent for near prime non-bank lenders.
It said the value of banking transaction data is that it is available across all consumer profiles and the financial, budgeting and spending behaviour of consumers is closely aligned to credit behaviour.
“The power of bank transaction data confirms the alignment between the broader financial and consumption decisions that people make and their propensity to manage debts and prioritise their obligations.”
Transaction data shows that consumer with better credit risk ratings consistently maintain a positive banks balance (avoid being overdrawn), consistently earn income, regularly pay bills, use direct debits for payments and keep their spending visible by using electronic payments in preference to cash.
“Augmenting credit information from consumer credit bureaus with banking transaction data provides consumers with the most equitable access to consumer credit, improving financial outcomes through a lower cost of borrowing.
“The utilisation of banking transaction data also has the potential to improve lenders’ profitability, as they gain greater access to creditworthy borrowers.”
illion used a number of case studies to demonstrate that banking transaction data is the best predictor of credit risk when assessing credit immature borrowers. Approval rates are maximised when banking transaction data, credit reporting data and internal credit scores are used.
It argued that such an approach would provide benefits to the lenders as well as the consumers, and the wider economy in the for of higher levels of productive consumption.
It also argued that the introduction of comprehensive credit reporting has been a positive development but it has limitations. Many high-cost lenders are not part of the CCR system, so prime lenders can’t see the performance of borrowers using those lenders.
This article is a reshare from Banking Day. You can read the article on their website here.