Consider a customer who approaches a bank or credit union seeking a small-dollar credit product. The customer is run through the traditional credit checks and found to be ineligible. The issue may be a thin credit file or no credit file, damaged credit from past mistakes, over-indebtedness, or a number of other reasons. What happens next? Is the customer turned away for good? Offered guidance on steps to improve his or her credit profile and invited to come back at a later time? Or does the financial provider use the opportunity to build a relationship with the customer, offering smartly designed tools and products that can help build or rebuild the customer’s credit standing?
Many financial institutions, particularly in today’s post-credit crisis economy, send the customer away, fearful that forming a relationship will impose too much risk on the institution or the customer. In doing so, however, these providers may be indirectly putting customers in harm’s way by driving them to lower-quality credit options while unnecessarily reducing their own potential customer base.
Banks and credit unions are, in fact, well positioned to help consumers build their credit profiles and gain access to well-structured credit. Those institutions that do so will derive significant long-term benefits in customer loyalty and retention and also uncover new potential revenue sources. Here are several initiatives that banks and credit unions can consider undertaking in the short-term, medium-term and longer-term to help build the credit profiles of low and moderate income consumers.
Short-term: Referral- and partnership-based solutions are relatively easy and inexpensive for banks and credit unions to implement in the short term. For example, online and mobile-enabled credit score tracking tools such as Credit Karma and Credit Sesame enable customers to closely monitor their credit scores and receive basic coaching on credit scoring, reporting and building. Credit Karma and Credit Sesame offer their services to customers free of charge and they enable consumers to engage with their credit scores on a regular basis.
Banks and credit unions can consider developing similar tools in house or simply referring credit-challenged customers to these services. Other strategies that may be relatively easy to implement in the short term include: partnering with non-profits to offer high-touch products and services, connecting customers to online and offline debt management programs and connecting customers to personal financial management tools.
Medium-term: Financial institutions can go beyond educational initiatives and referrals by offering customers credit-building products that reduce the risk both to the customer and to the financial institution. Financial institutions today offer various versions of products intended to help consumers build their credit scores (e.g., Self Help Credit Union’s Credit Builder Loan, secured credit cards offered by Wells Fargo & Co. and other banks and KeyCorp’s basic credit line) though, in most cases, these products could be marketed more effectively and bolstered with features that help consumers better manage the account.
Through our research, we have identified several best practices for financial institutions offering secured credit products. These include: creating credit builder loans that provide a disciplined path toward savings; offering budgeting and expense tracking features along with the product; creating a structure that enables customers to graduate to a partially secured or unsecured structure over time; and partnering with a nonprofit to offer products coupled with financial education to help consumers focus on building their credit profiles to position them for borrowing under improved terms in the future.
Longer-term: For those customers who do not qualify for credit on the basis of a primary screen because of a thin credit file or no file, an additional option for identifying the right lending approach is to look beyond traditional credit reports to see if other data can be used to evaluate the creditworthiness of the customer. Data available in-house may include information resulting from an existing account relationship with the customer, such as tenure with the financial institution, current and past relationships with the institution, deposit account balances and behaviors, or overdraft history.
Or, financial institutions may consider purchasing third-party data such as rental payments, utility payments, cell phone bill payments and public record information to assess consumer creditworthiness. More research is needed to evaluate the impact of these types of data on consumers and access to credit products over the longer term, but these systems are increasing and they offer a great deal of promise.
Consumers approach banks and credit unions in search of an appropriate small-dollar credit product every day and, in some cases, these consumers do not qualify for the product they are seeking. However, consumers should never have to leave a financial institution completely empty-handed and without any knowledge of how to improve their credit standing. There are a number of ways for financial institutions to help these customers and those institutions that do so will benefit in kind.
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