Improve Your Business Performance by Leveraging Financial Durability Insights

Todd Hoover is senior vice president, marketing practice for Equifax. Hoover enables clients to build best-in-class, data-driven marketing capabilities and programs. For more information, visit www.equifax.com.

Higher credit scores previously equaled low risk for telecommunications companies. With these new economic conditions and consumer behaviors, you need holistic data insights to better gauge a consumer’s ability to pay.

The credit positions for millions of Americans over the past two years have strengthened. This is due to  stimulus checks, loan accommodations, and fewer opportunities to spend on discretionary items. Surveys from the New York Federal Reserve1 state that as the economy rebounded from the initial shock of the pandemic, U.S. consumers showed a stronger demand for credit. Also, applications for credit in 2021 rebounded to pre-pandemic 2019 levels. This rebound was broad-based across credit score bands and age groups. But, the Consumer Expectations Credit Access Survey¹ data indicates the demand was strongest for consumers with less than prime credit scores and consumers younger than 40 or older than 60. 

No doubt, since the pandemic, credit behaviors and patterns have changed. According to a February 2021 Associated Press-NORC Center for Public Affairs Research poll, 68% of respondents said they were able to pay down debt or save more after the onset of the pandemic. This strengthened consumer spending power. Policymakers became surprised given the severity of the pandemic’s early impact on the global economy.

This shift in consumer behavior is quite a change for many industries. The CEO of America’s second-largest bank recently said consumers are spending “at a faster rate” than he’s ever seen. Yet, he remains concerned about how inflation and supply-chain issues will influence the economy going into the winter.² 
For those in the less-than-prime credit standing, the influx of Government stimulus boosted their ability to make purchases they may not have qualified for before the pandemic.

Higher credit scores previously equaled low risk for telecommunications companies. Yet, with new economic conditions and consumer behaviors, you need more holistic data insights to help gauge a consumer’s ability to pay.

How to Gauge Today’s More Complex Consumer Financial Picture  

With the positive effects of stimulus packages, how can you get a true financial picture of a prospective customer? The pandemic has made it more difficult than ever to look at two prospects with the same credit score. Especially when assessing risk and understanding who has the financial ability to pay for your services. 

While some consumers have thrived, others are challenged. Challenges include rising inflation, job changes, and overextended finances. For marketers and risk managers, these opposing financial situations present increased challenges in planning for acquisition and account management efforts. The ability to differentiate which consumers are able to meet current and future financial commitments, from those who are not is a must. Further analysis with Financial Durability has  potential to expand consumer access to telecom opportunities. 

Why Should You Consider Financial Durability?

You can use financial durability to obtain a robust view of a consumer’s financial resilience.  Consumer’s financial resilience is how likely a household is to keep spending and meet its financial obligations. Financial durability can help marketing and risk managers develop consumer strategies to differentiate consumers for acquisition efforts, inform pre-collections, and assist with treatment prioritization for delinquent accounts.
Many telecom providers are experiencing an increase in days past due delinquencies and write offs. That being said, it is important to understand a consumer’s capacity to meet their financial obligations through the additional lens of their financial durability.

What Does Financial Durability Analyze? 

Financial Durability modeling provides an indicator of financial resilience. Financial Durability modeling analyzes the intersection of many financial capacity measures including: 

• Affluence — based on a foundation of anonymous , aggregated invested assets 
• Estimated total household income — based on income from wages, assets, business, and retirement funds 
• Spending power — discretionary funds available to spend, save, or invest, after accounting for fixed expenses 
• Aggregated credit — such as credit utilization and delinquencies

Credit scores don’t tell the whole story. Marketers and risk managers that rely on credit scores for acquisition and account management may be missing out on other pieces of the consumer wallet. These can include resources that consumers have available for spending or paying bills. In fact, over 91.5 million consumers have thin or no credit files. This can create a significant gap in reaching new audiences and segmenting existing customers.

The visibility provided by financial durability helps you enhance multi-channel acquisition targeting with expanded prescreen and pay-over-time audiences. The visibility helps you by identifying consumers with modest, low, or no credit scores, but high durability. Equifax analysis indicates that companies can increase their return on investment. This is done by adding households with higher durability and suppressing households with lower durability.

Data is for illustrative purposes only. Results may vary based on actual data and situation. Financial durability measures were not developed or intended to extend credit to any individual, nor for purposes of determining an individual's creditworthiness or for any other purpose contemplated under the Fair Credit Reporting Act, 15 U.S.C. § 1681 et seq. 

It can also deepen customer relationships and identify high-durability accounts for new offers for increased services. For example, segmentation analysis coupled with financial durability highlights the improvement in durability score for Millennials and Gen Xers and the reduction in score for Gen Z. Applying additional segmentation analysis to your customer base can assist with both targeting and messaging.

To conclude, financial durability insight can inform account/portfolio management. It focuses on collections so that risk managers can better segment accounts by likelihood of delinquency and for pre-collections account treatment strategies. Equifax analysis has shown that durability is predictive of financial distress.  In 2021, consumers with the lowest durability had a delinquency rate 13x higher than those with the highest durability. This helps to rank high-durability households for focused retention, prioritize accounts in collections by durability to increase recovery, and to better understand risk of pay-over-time portfolios. With stronger visibility into consumers’ financial durability in this post-COVID era, lenders, risk managers, and marketers can make more informed decisions on how to manage their customer portfolios, better manage risk, and drive smarter revenue.  

 

 

1: https://www.reuters.com/markets/us/us-consumer-credit-demand-back-pre-pandemic-levels-ny-fed-survey-2021-11-22/  

2: https://abcnews.go.com/Business/wireStory/bofa-ceo-consumers-spending-fastest-pace-81719161  

3: https://www.cnbc.com/2015/05/05/credit-invisible-26-million-have-no-credit-score.html