Evolution of Consumer Credit: Credit Risk Decisioning
The future of consumer credit is bright. Advancements in risk decisioning, account acquisition and relationship management are transforming how lenders grow and protect their business. Despite this, financial institutions are far from realizing the true potential of such developments. Although we have vast amounts of data and new technologies, most lenders are not evolving at the pace of change. Adding to the complexity, non-bank lenders are gaining market share and disrupting certain sectors. They're doing this by breaking down traditional barriers and using alternatives to credit scoring. To stay competitive, lenders must stay ahead of advancements and embrace the future of consumer credit.
“Technology is permeating every part of our lives, and it’s poised to drastically change the way consumers borrow money and how lenders extend credit in the future.” – Visual Capitalist & Equifax, The Future of Consumer Credit, October 2018
The Evolution of Credit – A Condensed Timeline
Before we skip ahead, let’s consider how we got here. Our modern-day system of credit started about 5,000 years ago in Sumer, ancient Mesopotamia. Tracking the progression of credit, we see that the modern system started to advance in 1800’s England. Crossing the pond toward mid-century, a more formalized alphanumeric system for tracking creditworthiness took shape in New York. And in 1899, Retail Credit Company (now known as Equifax) was founded. As the twentieth century dawned, auto lending, installment loans for appliances and revolving credit began to take shape. Around mid-century, information once stored on millions of index cards started becoming digitized. And in 1989, a standardized credit score was introduced.
Today's Credit Landscape is in the Midst of a Revolution
It is only recently, however, that we've begun to embrace great advancements in technology. Additionally, an ever-growing quantity of data has created the perfect storm. It's only recently that we’ve begun to understand the potential of all the data at our fingertips. Machine learning and advanced analytics make it clear that our current system has room for improvement. Part two of our infographic series, The Modern Day Credit Landscape, shows how data and technology can provide a more accurate estimation of a consumer’s creditworthiness by:
- Combining traditional credit data with alternative sources -- such as telecom, utilities and specialty finance -- can help drive more informed credit risk decisions
- The predictive nature of trended credit data can help strengthen analytics and model development
- Moving beyond traditional modeling techniques, such as logistic regression, to calculate credit scores
- Applying advanced analytics and machine learning to reveal patterns of financial behavior that can help predict a consumer’s financial trajectory
Forces Shaping the Future of Credit – An Inflection Point
As with many areas of society, credit risk decisioning is benefiting from big data and advances in analytics and technology. In fact, we find ourselves at an inflection point. Will we embrace the possibilities, or will we continue to maintain the status quo?
“Modern credit systems are now powered by sophisticated algorithmic credit scoring, the use of trended and alternative data, and innovative fintech applications. While these developments are all interesting in their own right, together they serve as a technological foundation for a much more profound shift in consumer credit in the coming years.” – Visual Capitalist & Equifax, The Future of Consumer Credit, October 2018
Trends: How Consumers Will Access Credit in the Future
- Data & Advanced Analytics: The continued explosion of big data combined with more advanced analytic techniques, such as neural networks, creates deeper consumer credit insights and a 360 degree view of their financial behavior. In turn, lenders can better predict a consumer’s likelihood to repay debt.
- Consumer Control of Personal Data: Open data, a trend in Europe, allows consumers to decide who can access their financial data and for what purpose. Direct control over the use of their personal financial data will impact the credit industry, but to what extent is uncertain.
- Identity Verification & Authentication: Assessing one’s creditworthiness is only part of the equation. As we forge ahead, ever-increasing digital transactions will make verifying and authenticating an applicant even more paramount.
- New Players: A new era of Fintech and other third-party companies are already on the scene, and access to credit via apps and other channels is ever-evolving. Niche players will continue to expand and new avenues to credit will accelerate.
In conclusion, the continued acceleration of data, analytics and technology opens a new world of possibility. It provides a new dimension of insight into the financial profiles of consumers. As lenders grapple with how to embrace such accelerating change, the future of credit will be forever changed. We are at a key inflection point in consumer credit decisioning. Are you ready to embrace change? This is last article in a three-part infographic series with Visual Capitalist. You may also find the first two infographics in this series insightful - The History of Consumer Credit and The Modern Day Credit Landscape.
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