ATLANTA — In a recently released report, Credit Scoring As a Competitive Differentiator, Mercator Advisory Group surveys the opportunities and innovations taking place in the credit scoring industry, based on discussions with financial institution executives, vendors and regulators. The report cites LexisNexis® Risk Solutions innovative work in the areas of small business credit scoring and credit reports, using alternative data.
The study notes that credit scoring is an area of significant investment and innovation for traditional financial institutions, alternative lenders, and financial technology providers. Market saturation has caused a shift in the competitive dynamics for prime credit quality segments, as issuers overlap in their pursuit of high-quality credit borrowers. To address this, alternative decisioning models have emerged to identify potentially creditworthy customers otherwise left out of credit solicitation pools.
The recent emergence of financial technology has pushed the idea of credit scoring as a competitive differentiator. Many fintech providers, with a well-heeled investment community behind them, claim they have revolutionized consumer and small business credit risk management by applying “Silicon Valley smarts,” typically defined as a combination of algorithms and big data.
The report includes LexisNexis Risk Solutions as one of the vendors surveyed who suggest that using alternative data in the small business credit risk assessment process will double the size of a lender’s scorable universe of prospective customers. Under particular discussion is LexisNexis Risk Solutions work with the Small Business Financial Exchange (SBFE) and its database, which includes information on millions of small businesses in the United States and offers traditional and alternative lenders a tool for credit risk decisions on loans to small businesses.
The report points out that LexisNexis Risk Solutions testing suggests that less than half of small business applicants have a traditional credit-payment history and of those businesses with tradelines, about 50 percent are thin files with only one tradeline in their files. All told, the minority of small businesses in the U.S. have sufficiently thick credit histories to assess effectively credit risk based solely on credit payment performance. Noted Ben Cutler, senior director, Small Business Risk Management at LexisNexis Risk Solutions: “This points to a real need for alternative ways to assess the creditworthiness of these businesses.”
The best strategy uses multiple layers of public record and other noncredit data on top of SBFE Data™ to enhance the record data, the study continues. These elements include business registrations, tax records, firmographics, property and assets, and contact information; together they can serve to establish a profile of a small business up to five years before it formerly establishes a credit history. LexisNexis Risk Solutions testing indicates that lenders can materially increase their acquisitions with better segmentation on the surplus of thin-file and no-file applicants in their current applicant pool.
Cutler commented: “One of our primary goals is to help lenders expand not only their small business market but also to help lenders make better decisions on the large number of loan applications that they already receive from small businesses. These are two ways that the issue of small business inclusion can be addressed, which is important because when a small business has access to the credit it needs to grow, it can hire.”
In its discussion of alternative methods of determining creditworthiness, the Mercator study describes LexisNexis Risk Solutions enhanced alternative data scoring solution, which according to the report “helps lenders incrementally expand their addressable markets in a safe, compliant, and analytically sound way.”
About LexisNexis Risk Solutions
LexisNexis® Risk Solutions harnesses the power of data, sophisticated analytics platforms and technology solutions to provide insights that help businesses across multiple industries and governmental entities reduce risk and improve decisions to benefit people around the globe. Headquartered in metro Atlanta, Georgia, we have offices throughout the world and are part of RELX (LSE: REL/NYSE: RELX), a global provider of information-based analytics and decision tools for professional and business customers. For more information, please visit LexisNexis Risk Solutions and RELX.