Staying ahead of saturation: Three dimensions of universe expansion for personal loans
Personal unsecured loans have been a remarkable growth story in the past few years. From 2010 to 2016, lenders issuing 10,000 or more of these loans in each year grew from 70 to 121. Many are new FinTech lenders whose online interfaces and rapid underwriting have helped make personal loans a mainstream product. While FinTechs have driven much of the growth, conventional lenders, noticing the rise of personal loans, have ramped up their efforts to cross-sell these products to their customers.
Lenders need to continue finding new consumers in the market for personal loans. In this article, we will discuss how to expand your personal loan marketing in a risk-neutral manner.
Historically, personal loans had a reputation as being a subprime product, perhaps a loan of last resort, But consumers of increasing credit quality now take them out; the majority of new personal loans in 2015 were issued to near prime and prime consumers (i.e., those having a VantageScore 3.0 credit score of 601-720 on a scale of 300-850).
TransUnion’s consumer credit database shows more than 92 million consumers with credit scores in that 601-720 range. Only 16 percent, though, have a personal loan. How can lenders identify appropriate targets for continued growth in this desirable risk band? For this, we turn to universe expansion methodologies—that is, ways a lender can find consumers who may not meet the lender’s target marketing and risk criteria, but who are interested in the product and may in fact present acceptable levels of risk.
Risk expansion occurs when a lender adjusts its risk tolerance for a loan product. In its simplest form, the lender simply lowers its approval score threshold, such as reducing a minimum score for approval from 630 to 610. However, this comes with a cost—namely, greater losses.
Lenders can undertake risk expansion using dual-score matrices, where two scores measure different dimensions of consumer risk. Personal loans are popular among consumers new to credit and who often have thin credit files. These consumers benefit most from lenders’ use of non-credit or alternative data, such as reports from payday and rent-to-own lenders, as well as club and continuity programs.
The example in Exhibit 1 is for a sample of over 86,000 randomly selected consumers who opened a personal loan in the first quarter of 2015. These consumers were scored at account opening, and their performance tracked over 12 months. A lender that required a 60 or more days past due (DPD) rate of no more than 6 percent would accept any applicant with a VantageScore 3.0 score in the upper three quintiles, 629 and above. Applicants who scored below 629 would be rejected—but that excludes many consumers in the near prime space, a fertile ground for personal loan growth.
Now, let’s combine VantageScore 3.0 , in a dual-score matrix with TransUnion CreditVision Link, a score that incorporates alternative data. CreditVision Link allows us to swap out higher-risk consumers in the third quintile who were likely to lead to losses beyond the lender’s threshold. We can also swap in lower-risk consumers from the fourth quintile whom we would have missed without the alternative data.
In this example, the number of consumers swapped in is similar to the quantity swapped out. The consumers added represent a segment that, without alternative data, appear higher-risk and thus not as frequently targeted for personal loans. Yet they are more likely to respond to the invitations they receive, and can be priced at a higher rate as they receive fewer competitive offers. Finally, this dual-score approach allows us to remove a subset of the population with an average delinquency rate of 6.6 percent and add a segment with a bad rate of 4.5 percent, while maintaining the same target population size (and thus similar marketing spend).
Geographic expansion allows a lender to move beyond its geographic footprint. In making such an expansion, lenders should review performance in the expansion regions—there are often material local differences. TransUnion researched consumers with personal loans originated in the fourth quarter of 2013. Looking at those with scores in the 601-625 range, we observed 8.1 percent of consumers nationwide were 60-plus DPD on their loan after 24 months. A lender with a target risk tolerance under 8 percent would therefore not underwrite below a score of 625.
But such a rule would mask a wide geographic variation. As shown in Exhibit 2, focusing on the populous states of California and Illinois, we observe that 10.4 percent of consumers in the 600-625 range in California had a 60-plus DPD delinquency in the first 24 months on books, as opposed to only 7.9 percent in Illinois. A lender with a bad rate tolerance of up to 8 percent could underwrite loans to consumers with scores as low as 600 in Illinois and thus target an incremental 550,000 consumers in that state alone—simply by taking a more focused view of market-specific risks.
Product expansion is when lenders offer new products to deepen relationships with existing customers and broaden their appeal to more consumers. The lender’s rewards go beyond simply meeting borrower needs. TransUnion’s research has found that consumers with multiple accounts are less likely to go delinquent with every additional account they open with that lender, even when controlling for risk score. This loyalty also reflects a greater likelihood of these consumers to open another credit product or deposit account with the same lender.
Channel expansion occurs when a lender targets consumers through additional channels. For instance, a lender with a conventional branch network might consider a digital campaign to find consumers online. This allows the lender to reach beyond its established geography and find consumers where they spend increasingly more time: online.
These examples just scratch the surface of what is available today. Lenders that seek profitable, risk-managed growth will be well-served to consider of the many approaches to universe expansion. The options are diverse, dynamic and demand attention—for in an expanding universe there is no reason to think inside the box.
Ryan James Boyle is a Senior Manager in the Financial Services Research and Consulting team at TransUnion and can be reached at [email protected].
Ezra Becker is Senior Vice President of Research and Consulting at TransUnion and can be reached at [email protected].