Enhancing Risk Assessment with Innovative Solutions

In today’s rapidly changing financial landscape, traditional credit data is facing significant challenges, leading to potential blind spots in credit risk assessment strategies. These blind spots have emerged due to several factors:

• Regulatory Changes: New regulations are reshaping how credit data is reported and utilized.
• Non-Reported Deferred Payment Products: Many consumers use payment options that do not appear on traditional credit reports, like BNPL, creating gaps in visibility.
• Shifts in Tradeline Reporting Practices: Some lenders are changing how they report credit information, further complicating the assessment process.

While these challenges can create blind spots, there is data available that can help clarify consumer credit risk and enhance credit underwriting. The Consumer Financial Protection Bureau (CFPB) finalized its Open Banking rule in October, making it easier for consumers to access and share their bank account transaction history with lenders. This shift is pivotal, as bank account transaction data can be used to improve credit decisions with more comprehensive analysis and cash flow-based underwriting. 

Growing Confidence in Alternative Data

A recent survey by LexisNexis® Risk Solutions revealed that 88% of U.S. lenders are more confident in using alternative credit data compared to a year ago, while 60% express less confidence in relying solely on traditional credit data1. These findings underscore a significant trend in the industry, as lenders recognize the mounting limitations of conventional credit risk data. 

To add clarity to a consumer’s risk profile, lenders need to layer in additional signals, like those found in open banking and alternative credit data, into scoring models and decisioning workflows. While tradeline data remains relevant, it should be supplemented with complimentary data sources that together provide a more holistic view of a consumer’s financial health.

Enhancing Risk Assessment with Innovative Solutions

LexisNexis® Risk Solutions and Prism Data are leading the charge in augmenting traditional credit assessments.

• LexisNexis® RiskView™ Scores and LexisNexis® RiskView™ Attributes utilize data that signals consumer stability, economic trajectory, and near real-time credit-seeking behavior across lending products. These insights can be delivered through industry-leading three-digit scores and a suite of attributes highlighting 350+ next-generation insights that connect the nuanced details of non-credit life events with near real-time alternative credit-seeking behaviors.
• Prism Data offers its market-leading CashScore®, a cash flow underwriting score that reflects sophisticated analysis of income, expenses, savings, and financial behavior, based on bank account data. CashScore is developed on large consortium datasets representative of the typical U.S. consumer. It has been shown to be highly predictive of credit risk up and down the credit spectrum and orthogonal to other data sources like credit bureau data and alternative data. Additionally, Prism also offers a library of tens of thousands of predictive attributes derived from bank account data that can be used for custom models and strategies. These attributes describe the elements of a consumers ability- to- pay, provide visibility into major financial obligations that are not reported to the traditional credit bureaus (such as rental payments, Buy-Now-Pay-Later loans, and Rent-to-Own arrangements), and indicate the presence of risk red flags like gambling, among other things.

The Benefits of Open Banking and Alternative Data

Utilizing Open Banking and alternative credit data allows lenders to:

• Rank Order Risk: Effectively assess risk in thin-file and no-hit populations.
• Segment Risk: Further refine risk assessments within traditional bureau score bands, enabling more precise and competitive pricing.
• Expand Approvals: Increase the number of approvals without raising risk thresholds.

These innovative solutions can be applied throughout the consumer lifecycle—from prescreen and prequalification to origination and portfolio monitoring.

A Collaborative Approach to Credit Risk

The alliance between LexisNexis® Risk Solutions and Prism Data offers lenders a more comprehensive approach to credit data solutions, aiming to clarify consumer credit risk. By embracing these advancements, lenders can not only enhance their risk assessment strategies but also foster financial inclusion.

As we move forward, the integration of Open Banking and alternative data into models will be crucial in shaping the future of credit risk assessment, helping lenders make informed decisions while better serving consumers. The landscape is changing, and those who adapt will thrive in this new paradigm of credit risk assessment.

1 LexisNexis Risk Solutions, Global Consumer Lending Confidence Report, 2024