The US’s middle classes are drenched in debt and demand is slowing. So how do banks build profits? By bending the rules.
Two of the top credit analytics companies are exploring new ways of assessing consumers’ ability to handle loans, turning away from traditional sources of data such as credit cards and car loans to scour phone and utility bills, change-of-address records and information drawn from DVD clubs and suppliers of rent-to-own furniture.
The efforts could open up new classes of customer for the big US banks, and come as lenders struggle to generate steady profits in an environment of tightened regulation and ultra-low interest rates. In third-quarter results this week, the US’s three biggest banks — Wells Fargo, Bank of America and JPMorgan Chase — have reported year-on-year declines in quarterly revenue.
One of the companies, FICO, has been working on a pilot project with a dozen US credit card companies, and now claims to have developed reliable ways to price loans to millions of people who have historically been off the grid.
Will Lansing, chief executive of the San Jose, California-based company, said FICO was increasingly looking at data on a spectrum: with credit card repayment history at one end — the most reliable guide to creditworthiness — and at the other, information volunteered on social media platforms such as Facebook.
“If you look at how many times a person says ‘wasted’ in their profile, it has some value in predicting whether they’re going to repay their debt,” he said. “It’s not much, but it’s more than zero.”
Credit cards and car loans are likely to be among the bright spots in the US banks’ third-quarter figures, with much of the growth driven by segments considered subprime. But mortgages and personal loans should be patchier, suggesting that many consumers across the US have borrowed about as much as they can.
Aggregate household debt balances were unchanged in the second quarter at $11.85tn, according to data from the New York Federal Reserve, and remain more than 6 per cent below the pre-Lehman peak.
TransUnion, another credit-analytics group, has embarked on a project to tap alternative data sources to help people with blemished records get better terms.
Both FICO and TransUnion say they are responding to demand from their ultimate customers, the banks, which worry that by declining people without traditional credit scores they are turning away potential sources of profit.
“The market was absolutely hungry for a solution,” said Jim Wehmann, executive vice-president for scores at FICO.
FICO, which led the practice of custom scoring in the 1950s and whose scores are now used in about 90 per cent of credit decisions in the US, is pursuing its project in partnership with Equifax, one of the top three credit-reporting bureaux, and LexisNexis Risk Solutions.
The new model gives high marks to people who have regularly paid phone and utility bills, and who have not moved around enough to suggest problems paying rent.
Some of the new credit-eligible customers are new to the country, some are young — and some have simply not borrowed enough to generate traditional files. But the alternative data suggest that many are a good credit risk. “We can now score the previously unscoreable,” said Mr Wehmann.
Mike Mondelli, Chicago-based senior vice-president of alternative data services at TransUnion, said a broader approach to scoring could lead to cheaper loans for 23m consumers — typically “someone who has some bumps in the road on credit, but who pays more than the monthly minimum”.
From the banks’ point of view, he said, it is “good for adding more customers at an acceptable risk rate”.
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