When it comes to financial health vast segments of Americans are experiencing signs of increased vulnerability despite a booming economy, according to the U.S. Financial Health Pulse: 2019 Trends Report (Pulse)
Financial health is defined by the U.S. Financial Health Pulse: 2019 Trends Report as a composite framework that considers the totality of an individual’s financial situation. The Pulse report scored respondents against eight indicators: spending, bill payment, short-term and long-term savings, debt load, credit score, insurance coverage, and planning. It then assessed whether they were financially healthy, financially coping or financially vulnerable.
One of the key findings from this research is that only 29 percent of Americans are currently financially healthy, up just one percent from 2018. In contrast, over 70 percent of Americans were classified as financially coping or vulnerable by the Pulse report’s standards. This finding illustrates the challenge lenders face in pinpointing the healthy 29 percent, while also finding the potential within the 70 percent of individuals who may be trending toward financially healthy status. Credit risk solutions that use alternative data such as those provided by LexisNexis Risk Solutions allow lenders to rank order risk in this population. Alternative data not only helps to approve more creditworthy applicants but can also identify borrowers who may not have been on the radar of regular credit bureaus. Thus they can identify good credit as well as expand financial inclusion in the population.
A Call to Action: Creating Opportunities for Access
These conclusions present a call to action for all organizations that have a stake in the financial well-being of American households. While the report is not all negative, there is certainly an opportunity to leverage tools to help consumers to access credit, manage their debt and build emergency savings. Importantly, the report reinforces that traditional economic indicators do not fully reveal the dynamic and multifaceted financial reality of most American households.
Lenders are encouraged to responsibly look beyond the traditional credit score and leverage alternative data — a set of non-standard private and public data — for an expanded and more holistic analysis of the individual’s credit potential.
Most of all, the Pulse report validates that although there is a positive correlation between financial health and income, income does not determine one’s financial health
. Since financial health is fluid, the report statistics present an opportunity for financial institutions to focus in on ways to help the most vulnerable consumer segments build their financial resilience. Lenders are encouraged to responsibly look beyond the traditional credit score and leverage alternative data — a set of non-standard private and public data — for an expanded and more holistic analysis of the individual’s credit potential.
Determine if a Consumer Financial Shift is Temporary or a Long-Term Trend
The Pulse report reveals that consumers who have had changes in their employment and physical health saw the largest year-over-year shifts in their financial health. According to a Consumer Financial Protection Bureau study from 2014
, roughly 43 million Americans
have unpaid medical debt dinging their credit, and half of all overdue debt on Americans’ credit reports is from medical expenses.3
These hits to traditional credit scores can be dramatic but when predicting credit risk, it is essential to view a person holistically. Many factors, such as professional and recreational licenses, education and address stability, can provide additional context around an individual’s true creditworthiness and offset temporary disturbances in traditional credit scoring such as unpaid medical debt.
Utilizing alternative data can provide a more stable view of a consumer, allowing lenders to more clearly determine if the consumer is experiencing an unfortunate but temporary event or a more permanent long-term downward trend. By making this determination, lenders are better poised to offer the appropriate support while mitigating risk.
Identify New Creditworthy Customers that You Previously Would Have Overlooked
Individuals who do not have enough of a credit footprint to be scored by traditional credit bureaus are known as credit invisibles. The American Bar Association published an article titled, “Serving the Credit Invisibles: Opportunities and Challenges for the Consumer Finance Industry”
in March 2019.2
The article estimates that 35 million to 44 million Americans remain outside of the credit mainstream with limited or no credit histories. These segments may include Blacks, Hispanics, the elderly, young consumers who have yet to establish a credit background, recent immigrants and low-income individuals.
By incorporating alternative data into their credit strategy, lenders may be able to identify new customers in overlooked segments that are lower risk. As a result, lenders can offer these individuals rates that are more fairly and accurately aligned with their true creditworthiness.
Close the Gap Between Awareness and Action
Financial service providers have a distinct opportunity to play an active role in influencing financial health outcomes. A report from the Center for Financial Services Innovation (CFSI), the nation’s authority on consumer financial health, titled “From Buzzword to Business Model: How Industry Executives View Financial Health”
, was published in April 2019.4
It revealed that 69 percent of financial services executives stated that improving customer financial health is a top strategic priority.
Despite these findings, a significant gap exists between awareness and action. Only about a third (35 percent) of the executives stated their institutions are currently tracking customer financial health outcomes and improving their offerings based on customer financial health data. And only 37 percent reported that their institutions offer low-cost, entry-level transactions that are especially relevant for vulnerable customers.
One key strategy that lenders can use to help consumers reduce debt is by offering loans at rates that more appropriately assess the risk of the individual. Alternative data can enable that ability by providing an expanded more holistic view of the consumer or business.
Considering the growing importance of access to data for holistic financial health management, stakeholders — financial institutions, policymakers, and regulators — should also support policies that promote an inclusive and secure financial-data-sharing ecosystem. Adding alternative data to the credit decisioning mix provides a more comprehensive view of the financial risk and potential of consumers than traditional credit data alone.
When the financial sector leverages the latest data and technology, it becomes well primed to positively impact the financial health of consumers starting with expanding affordable credit access. The organizations that seize this opportunity will have a distinct financial advantage.
2 Olga Khazan, What Happens When You Don’t Pay a Hospital Bill, TheAlantic.com, 2019, August 28
3 Serving the Credit Invisibles: Opportunities and Challenges for the Consumer Finance Industry, Americanbar.org, 2019, March 29
4 From Buzzword to Business Model: How Industry Executives View Financial Health, Flourishventures.com, 2019, April 29