By Ray Birch
BOSTON—While lending at credit unions remains strong, CUs potentially face a pivotal point in their lending future, a new report suggests.
A new study from Aite Group indicates that prudent use of alternative credit data—such as telephone and utility payment history—will be critical to keeping the loan portfolio growing. However, the report shows that it is primarily the large lenders that are leveraging such data today—adding it to traditional and trended credit data—and that most community banks and credit unions are cautious to use the new resource.
Christine Pratt, senior credit analyst at Aite Group, noted that community lenders will need to make a decision. She told CUToday.info that in the new Aite report, “Community Lenders’ Answer to Alternative Data/Analytics: We’re On It,” community lenders stated they make minimal use alternative credit data, and express concerns over the validity of the newly minted alternative data and score performances. What that may lead to, suggested Pratt, is a lack of qualified new borrowers in the coming years.
“I think there is a real lack of new borrowers out there and the competition is heating up, especially with interest rates rising,” said Pratt. “There is a real question in the minds of lenders now—and especially community lenders, the study shows—as to whether there will really be a lot of more qualified borrowers.”
Volume Key
Pratt said that even in the lending boom leading up to the Great Recession, the growth was buoyed by volume, not necessarily by adding new borrowers.
“Now I am hearing from lenders more talk about the number of qualified borrowers,” said Pratt, adding that the issue is likely due to constrained consumers, not too many FIs in the market.
Pratt emphasized that a key finding from her report is that the large lenders have learned recession lessons and are using alternative data carefully—while the smaller lenders remain cautious.
As CUToday.info has reported, the major credit bureaus have also moved to introduce new scoring models that incorporate alternative credit data.
Pratt said there is “no doubt,” based on the study, that credit risk management “weighs heavily on the minds of community lenders. This group had a more difficult time letting go of credit risk, which ties back to their focus on customers and their uncertainty about the validity of the newly minted nontraditional data/analytics and scoring.”
Contrast that sentiment a finding in the report that 75% of top lenders in 2016 said that they use alternative data and believe in its potential, and attest to already seeing results.
“Overall, users see alternative data, analytics, and tools as a significant opportunity for mitigating credit risk and fraud going forward,” said Pratt. “Vendors with scores and tools for provisioning to community lenders would be well-served by addressing these pain points and demonstrating credit-risk-mitigation capabilities in originations or collections first, before tackling other challenges.”
Pratt said the Aite study reveals the concern community lenders have for the future of lending, citing study responses given by community lenders in 2016 and then again in 2017. She pointed out that in 2016, 65% of community lenders were not concerned about attracting new borrowers. However, in 2017, 60% of community lenders in the study indicated they were highly concerned with the lack of qualified loan applicants at their institutions.
Inadvisable Rsk
But Pratt is confident that competition is pushing community lenders to use alternative data and analytics. “In particular, (competition) from those lenders that use social networks to evaluate credit risk and opportunities for customer acquisition or retention,” said Pratt, who noted that 2017 study data show that more than 40% of community lender respondents feel that new competitors pose a significant threat to their FI’s ability to attract and even to retain borrowers.
“For these 2017 lenders, the danger for an FI when facing stiff competition—that it may take inadvisable risk with credit policies or pricing in order to compete—can be mitigated if there is some science behind the risk taking,” said Pratt. “The good news for community FIs is that proven scoring models and even some analytical tools can help analyze opportunities to educate consumers and expand the new-customer base while improving intelligence in the adjudication process and increasing inclusion.”
Pratt provided the following recommendations:
- If the FI is not convinced that alternative data/scoring works, consider leveraging compliance: “Many FIs need CRA help, and alternative data/scores can enable sound lending decisions for previously unscorable or thin-file consumers. Success means the ability to move scoring advances into more traditional credit adjudications.
- Understand that mitigating credit risk is key to growing profitable portfolios: “Before embracing new products or plans to attract new borrowers, be sure that the portfolio’s credit risk is analyzed and not growing. If alternative data/analytics are in play, vet thoroughly.”
- Consider leveraging cost/benefits ideas from peers and competitors: “Discovering cost justifications for new IT investments and budget increases can be challenging, and one size never fits all. Carefully examine results-producing options shared by other lenders or vendors.”
The report is based primarily on a June-August 2017 Aite Group online and in-person survey of 41 executives at U.S. community banks, credit unions, and finance companies, each with less than $5 billion in assets. The report also contains analysis from 2016 in-depth Aite Group interviews with senior management at U.S. banks, credit unions, and finance companies that have significant consumer and small business credit portfolios. It also includes 20 executives’ responses to an Aite Group survey of the top 50 U.S. consumer and commercial lending institutions during Q4 2015 and Q1 2016.