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In a recent episode of 21st Century Entrepreneurship Podcast with Martin Piskoric, Joel Rickman, Senior Vice President at Equifax Workforce Solutions, shared his insights into the evolving lending landscape and the increasing importance of alternative data sources.
Equifax's The Work Number® database has been transformative, contributing to many U.S mortgage lending decisions and enabling millions to secure auto financing, personal loans, credit line increases, and more. The Work Number data also helps expedite employment background checks and the awarding of government benefits. As Equifax expands globally, it strives to empower individuals and businesses with data-driven solutions.
Listeners are encouraged to take away the idea of experimenting with diverse decision-making processes. Joel reminds us of the uniqueness of each borrower's life experiences, urging lenders to broaden their data sources and thereby expand their customer base, helping unearth "diamonds in the rough."
Joel described how as lenders are working harder to provide better loans to their customers, the last few years has seen lenders move from brick and mortar type lending environments to digital environments where lenders may not get to meet the borrower firsthand. Lenders are often looking for more data to assist in this process and sometimes require alternative sources of data.
Equifax has adapted to changes in the market by helping credentialed lenders get connected to The Work Number through integrations, so those lenders can get instant data that is easily accessible and updated each pay cycle by employers and payroll providers.
One example of how lenders might utilize alternative data that Joel provided is in the auto space when a potential borrower doesn't necessarily have a full credit report or might be considered a subprime borrower. That borrower comes into a dealer, picks their car, and then goes back to the financing office. The financing professional will pull up a credit report and if the potential borrower does not meet a prime lender's requirements, the financing professional will put that loan out to three or four lenders to bid on that loan. Joel noted that Equifax used to only see inquiries from one of those lenders utilizing alternative data, but now it’s common to see inquiries for alternative data from all three or four of those lenders.
In the end, this additional data may allow lenders to offer a better rate on the loan and provide the loan without other stipulations. Those companies are growing and winning more of the loans as they use alternative data in their decision-making process.
Joel shared an observation that there are many startup companies or smaller companies in what's referred to as the Fintech space. Fintechs can mimic and perform like large organizations with the right tools. Joel opined that a consumer that has an 800 credit score in the United States is likely to have lenders ready to lend them money, but noted that he is seeing fintechs succeed in finding those unique pockets of individuals that are looking to get credit and build their creditworthiness and credit report, but who haven't always had the easiest path towards achieving those goals.
Joel has observed a number of Fintechs that are taking a borrower’s credit score and, in the case of a lower score, applying additional data such as The Work Number income and employment data. Joel is also seeing lenders use data from other repositories of Equifax such as utility payment data. Pulling multiple data streams into a lending platform allows these startup organizations to compete with the larger organizations because they can make decisions based on a broader profile of the consumer. The lender is able to get a full view of what may be a lower credit score consumer with a really high income, often because that consumer is younger and they just haven't borrowed a lot of money previously.
As lenders pull these data pieces together, they now can start to see what a gem they - might have and that those borrowers are someone they want to be a customer. Lenders can then empower that to happen. Joel believes that where Fintechs can really disrupt the market is by finding borrowers that want the opportunity to get mainstream lending products but haven't qualified through some of the traditional banking rules that have existed over the years.
Joel highlighted that one area of concern for digital lenders and the Fintechs of the world has to do with security and reliability. He noted that Equifax has worked hard to integrate with its clients and lending platforms. A portion of the transactions Equifax sees originating out of those lending platforms happen after business hours or on weekends. This is because that's when consumers are free and that's when they are shopping and completing loan applications.
Equifax focuses on having a 24/7 platform that credentialed lenders can connect to. With a focus on digital experience, Equifax has invested in security, has been evaluated by security professional organizations, and ranks as a leading organization across multiple industries. Equifax takes security very seriously. As the lending industry moves towards digital processes, Equifax knows there is extensive information about consumers and individuals available to lenders. Equifax wants to ensure that it is making the employment and income verification process as safe as possible.
Financial inclusion has become a very hot topic, both in the United States and internationally. Lenders are asking,“How do we include more consumers? How do we find individuals that are credit-worthy so we can help enable their dreams? How do we help make that mortgage available? How do we help make that car loan available?”
Sometimes it's a personal loan when a consumer gets out of school to get started in their career. Equifax believes that in many cases a credit report by itself does not reflect the individual's entire capability of paying a loan back. t Income and employment is a significant indicator of someone's ability to pay, and there are direct relationships between a borrower’s ability to repay and job tenure. If someone has had a job for several years, they may perform as a very good near-prime or even prime-type borrower, even if they make less money or haven’t had credit before.
One of the things that Joel enjoys is the opportunity to work closely with Equifax Clients. Equifax has a number of sales reps and product specialists that will work with lenders to map out their current lending process and rules in order to help them identify what the return on investment (ROI) would be to add alternative data sources into the process. They specifically discuss adding income and employment data into that model and how it'll help a lender not only help to reduce risk but also close more loans. Alternative data can help answer the question, “How can I expand my opportunity with my customers?” in a risk managed way.
Equifax works with clients on a daily basis to map out an ROI, develop a proof of concept, hit the ROI and exceed it - that’s exciting to Joel and means that everything's working. It means Equifax took the time to understand the client's business, the client understood the value of the data, and together both organizations made a meaningful impact on the lender’s business. Now there is a new partnership for growth and that's a really exciting result for Joel, when Equifax works together with clients at that level.
Equifax data is also used when someone goes to look for a new job and is validating their previous places of employment. Additionally, in the United States Equifax data helps the government determine eligibility for Social Security benefits. Equifax takes pride in helping people get things done and Equifax data is used to empower that goal.
A key thing Joel wants lenders to take away from this discussion is the concept of experimenting with different decision processes. There are many borrowers out there in today's world, no two are the same. Everybody comes with different life experiences. Everybody has access to different education, or resources, but at the heart of lending is, do I believe this person has the ability to pay me back and do I believe they're willing to pay me back? That's what it really comes down to.
There are many resources out there that can help lenders get there. Of course, there's the credit score and it's a wonderful predictor of future payments, but if lenders don't have that or if it's lacking sufficient trade lines , lenders might go out and look for utility data or rent data. What does that say about the borrower’s payment history?
Of course there is income data - if a borrower has sufficient income and they're sharing with a lender what their expenses are, a lender can quickly calculate their ability to pay the lender back. Even in a self-service fully digital world, lenders can help that consumer calculate how much they can afford to borrow. Lenders then can work with that consumer interactively throughout the month to make sure they're making the payment and to make sure that they're staying on top of their responsibilities. That whole ecosystem working together is what really excites Joel.
Joel hopes lenders will take away that if they are only using a few data sources or a single model in their approach to lending; they should get out there and experiment with some of the other data available, experiment with how it can help expand their customer base and help them find those diamonds in the rough that can end up being great customers for them in the long run.