MADISON, Wis.—There’s a large consumer segment that banks have yet to give attention and which represents a significant growth opportunity for credit unions, asserts one analyst.
A group of more than 30 million people, or more than 11% of the adult population, lack a credit history or have very thin credit files. But this group is not the traditional underserved or underbanked–it is comprised largely of younger Americans, those who rely on cash, older adults who have left the credit market and successful individuals who recently moved to the U.S. The CFPB, which has conducted extensive research on these Americans, calls the group the “unscorables” and “credit invisibles.”
Consumers without credit records are considered the invisibles, while those with thin files are unscorables, the CFPB explained in its study.
George Hofheimer, chief knowledge officer at the Filene Research Institute—which in recent years has initiated several programs to evaluate the viability of the traditional underbanked for credit unions—says CUs can grow with this emerging credit group if they are approached correctly.
Specific Needs
“This is a market that has very specific needs that the traditional financial institutions have not yet figured out how to meet,” said Hofheimer. “But these people present a real opportunity for community based institutions, like credit unions, to determine how to best serve this marketplace because the traditional models have not worked.”
Hofheimer stressed that finding the right alternative credit underwriting models is imperative.
Hofheimer referred to several Filene “incubator” projects that have worked for credit unions in recent years, each finding alternative ways to evaluate the credit worthiness of the underbanked—including unscorables and invisibles—such as using rent history and utility bills. Hofheimer also noted the alternative credit scoring solutions that are appearing nationally, such as those from LexisNexis and Equifax.
“The promise with these unscorables and credit invisibles is that you bring them into the credit union using alternative scoring models and alternative products and then you eventually improve their credit and bring them into mainstream banking with the credit union’s traditional, affordable, consumer-friendly products,” said Hofheimer.
Hofheimer acknowledged the risk that comes with reaching out to the invisibles and unscorables.
“This is a different market than what most credit unions are used to. It is a higher risk market simply because of the unknowns. But these are not bad people,” said Hofheimer, adding that many are simply in the wrong credit category due to their thin credit history. “But this is a large market and is present in all communities across the country. This, again, is a growth opportunity.”
George Hofheimer
Credit unions are already serving a portion of this market through some of Filene’s recent incubator projects, including:
- Employer-Sponsored Small-Dollar Loans program: A program that is offered to a CU’s SEG and loan payments are auto-deducted from direct deposited accounts.
- Borrow & Save: Established by the National Federation of Community Development Credit Unions, Borrow & Save is an affordable small dollar loan with a payment term tailored to the borrower. A built-in savings component also enables consumers to self-fund emergency expenses.
- Non-Prime Auto Loans: The National Credit Union Foundation's Non-Prime Auto Loan program helps lenders offer and manage fairly priced non-prime auto loans to consumers.
“These incubator tests have worked on a small scale,” said Hofheimer. “And by no means are all of these focused on the credit invisibles and unscorables. But each of them has some sort of alternative credit underwriting criteria to determine how to get mainstream products to these individuals. Some of these have been very successful.”
Tech Makes Group Reachable
Hofheimer cited reasons for the growing interest in the unscorables and invisibles. He said technology is now making it easier to access more forms of credit data, and analytics can better target the invisibles and unscorables. He also said that the stagnation of income at the lower income levels is causing greater financial difficulty among Americans resulting in more people not fully participating in the traditional credit system.
“Are these people really good risks? That’s the big question now,” said Hofheimer. “Any time there is innovation you have to be careful. But as I said, efforts we have seen at Filene, so far on a small scale, look promising.”