Need Cash? Companies Are Considering Magazine Subscriptions and Phone Bills When Making Loans
The way lenders decide who can borrow money is undergoing its biggest shift in a generation.
For decades, banks and other financiers have relied primarily on consumers’ borrowing history to make lending decisions. Now revenue-hungry companies are considering metrics both mundane and peculiar, like whether applicants shop at discount stores, subscribe to magazines or pay their phone bills on time.
Those experimenting with new metrics range from big-name banks like
Goldman Sachs Group
to upstart financial-technology firms.
The changes are an about-face for many banks, which have spent much of the decade since the financial crisis chasing mostly ultra-creditworthy customers. But that pool is only so big.
The field of potential new borrowers is huge: About 53 million U.S. adults don’t have credit scores, according to
, creator of the widely used FICO scores. Another roughly 56 million have subprime scores. Some have a checkered borrowing history or high debt loads. But others, banks point out, just don’t have traditional borrowing backgrounds, often because they are new to the U.S. or pay for most expenses with cash.
Despite some signs that the economy is strong, such as low unemployment, it is also showing symptoms of wear. U.S. consumer debt is higher than ever, with many Americans forced to borrow to keep up with rising costs for cars, college, housing and medical care.
Christina Segura, 24, had a low credit score from unpaid medical debts when she applied for financing from fintech startup Meritize. But the company, which funds higher education and skills-based training, used her high-school transcript to approve her for loans totaling $9,000 to attend pipe-welding school.
Meritize considers factors such as improvement in grades and signs that students challenged themselves, said Chief Executive
The firm, he said, is “essentially proxying grit.”
Government officials at times have encouraged or even required changes to the information in credit reports and scores, reasoning they would bring loans to deserving borrowers who might not fit a traditional mold.
During the past few years, lenders including
Capital One Financial
have been talking to FICO about whether incorporating new data into credit scores could boost loan volume, according to people familiar with the matter. Separately, lenders have been asking
PLC for ways to find new customers who are more financially responsible than their credit records suggest, according to people familiar with the matter.
The U.S. lending industry revolves around consumer data. Lenders feed information on their customers to credit-reporting firms Experian,
which compile lengthy dossiers on borrowers. FICO scores condense the data in those reports—such as payment track record and ratio of credit-card spending limits to owed balances—into a number between 300 and 850.
While changes at individual banks can affect slivers of consumers, the changes made by the credit industry affect a broad range of Americans.
Last October, for example, FICO announced it had developed a new score—UltraFICO—that factors in how applicants manage the cash in their checking, savings and money-market accounts. The new score functions as a sort of appeal: If an applicant’s traditional FICO score falls short, a lender can offer to have the score recalculated. About 37% of FICO’s revenue comes from the credit scores it sells.
And TransUnion says it sells alternative data to U.S. lenders that can include whether consumers subscribe to and pay for magazines. “It’s an indicator of stability,” said
senior vice president of global data strategy.
Credit scores have been the bedrock of consumer lending for decades. Fair Isaac created the FICO score in 1989, and banks adopted it broadly in the 1990s. Investors that buy securitized consumer loans—sliced-up pools of credit-card, auto and mortgage debt—often rely on FICO scores to assess their risk.
Critics say the changes could make millions of borrowers appear safer than they are, diluting the value of credit scores and reports. Others say the alternative metrics, like a consumer’s reliability in paying electric bills, don’t translate into a likelihood they will repay their loans.
Consumers with thin credit files are more likely to default on their loans, though the majority of them perform well, according to TransUnion. FICO estimates that about one-third of people who don’t have credit scores had a major negative event like a bankruptcy at some point in their past.
Goldman Sachs started making personal loans in 2016, part of a bigger move into consumer banking. Among other factors, it considers whether applicants overdraw their checking accounts.
A Goldman Sachs spokesman said the bank has “built a technology and data architecture that can ingest and use multiple sources of data to make the best decisions for the customer and the bank.”
Some would-be borrowers have low credit scores because of a limited U.S. borrowing history. Per Breivik said he had a credit score in the low 300s after he moved to Houston from London last year, and had trouble getting a credit card.
Mr. Breivik, who runs maintenance for a drilling company, turned to
PLC. “I said, ‘We need to try to work something out. I have all this history with you guys,’” he said, referencing deposit accounts with the bank abroad.
HSBC reviewed his relationship with the bank, including his record of repaying an HSBC credit card he had before he moved to the U.S., and approved him for a U.S. card.
Some lenders are working with fintechs that assess consumers’ purchase data to determine risk. Fintech ZestFinance, for example, says applicants who spend more at grocery stores than on eating out tend to be a lower risk, as are those who shop at discount stores or are registered to vote.
Angel Hernandez, a 42-year-old maintenance worker, used cash for almost everything for much of his adult life. He has twice tapped Spring Bank for loans to pay for funeral and travel expenses when relatives died. Spring Bank, based in the Bronx, N.Y., lends to consumers with little to no credit history.
The bank verified Mr. Hernandez’s income with his employer. It also had him set up a savings account at Spring Bank where a portion of his paycheck was regularly deposited. Spring Bank made withdrawals from it to repay the loan.
Mr. Hernandez recently received his first credit card offers in the mail. He has since signed up for several cards.
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