Problems with accurately credit scoring people in their 20s and early 30s is nothing new, and there have been discussions around integrating alternative data into the credit scoring process for years. But like everything that touches the Millennial generation, there is a renewed immediacy to rethink tired, cumbersome methods and find a more holistic approach by building financial profiles with alternative data sources. Everything from social media accounts to wine of the month club subscriptions, Venmo transactions to blockchain accounts, have been proposed as a way to look deeper into one’s financial habits.
The question then becomes, “What data would actually be helpful when calculating a credit score for a Millennial?” This answer can be complicated because many Millennials interact with their finances in a completely different way from previous generations and are living much of their financial lives through online services that offer streamlined processes that legacy financial institutions cannot provide. Despite wanting to work with banks due to brand recognition, Millennials often turn to fintech startups that simplify processes since most financial institutions have failed to adapt with evolving customer demands, such as communicating in shorter timespans and offering real-time decisions.
What to Score?
Due to the disparate and diverse nature of Millennials’ finances, it’s hard to determine how to best evaluate each individual’s financial wellness. Historically, credit scores rely on the number of accounts held, length the account has been open, or how those accounts have been paid, which already puts Millennials at a disadvantage as they are just entering the credit lifecycle. But because most Millennials use new and different tools to manage their finances, much of their activity is largely invisible to credit bureaus. Alternative data has the potential to change this because it considers things outside of what credit bureaus have access to that demonstrate consumers’ payment history and behavior, which is key in making credit decisions.
One type of alternative data that is often suggested is checking account data, because it allows for credit algorithms to look at transaction patterns like regular utilities payments, strong cash flow and other activities that show positive indicators of behavior. Investment information isn’t as viable for Millennials today, but analyzing income and savings patterns, such as a 401k accounts could provide a more comprehensive view of an individual’s financial health. Utilizing this type of data source provides some of the most stable forms for alternative data, thus allowing for an expanded view of the customers’ financial activity, helping to better serve their lending needs.
In some cases, it even makes sense to look at the data from digital payment platforms like Venmo – which increasingly is used for major financial activities such as paying rent, insurance or tuition – that can validate a regular frequency of on-time payments, which is critical in determining creditworthiness. Examining data from mobile wallets such as Apple Pay, which now plays a greater role in financial management and purchasing decisions, could also provide new insights into an individual’s financial well-being.
Many have suggested that social media data should also be considered to credit score Millennials. LinkedIn could be used to verify employment history, small business owners’ Yelp reviews could show the health of their business, and Facebook milestones could indicate major changes ahead. Although incredibly insightful, this can be very hard to quantify and carries an incredible amount of risk as this type of data can be misinterpreted or subjective, so it should be considered very carefully. Social media data may also have the potential of being manipulated.
One very interesting new source of alternative data that some financial institutions are experimenting with is how potential customers are navigating around a webpage before applying for an account or loan. By looking at how much research users do, how many options they’ve evaluated, how many pages they’ve clicked through and how long they stay on the page, financial companies are trying to determine how seriously users take the process as an indicator of their potential as a customer. While this is interesting from a psychological standpoint, it is hard to qualify someone’s ability to make regular payments, especially without a demonstrated history of payment.
Millennials have issued a call to action to financial institutions. However, providing a service doesn’t just mean providing a loan; they want a partner in their finances that thinks and behaves like them. Financial institutions have to be more creative in what they offer: the type of loan, duration, products… and the criteria involved in lending decisions.
This new reality of higher customer expectations requires more than technology; it demands a new approach to engaging the customer. Millennials expect to have real-time pricing information based on real-time data available at the click of a mouse. They expect an intuitive, simplified application process, whether it is delivered in person or over the internet.
Financial institutions must move forward with the customer and adapt to their expectations, or they will lose the opportunity to serve this generation as customers. By going beyond traditional credit scores to include alternative lending data such as checking account transactions, deposits and balances, financial institutions can gain more insight on the borrower’s credit risk as well as provide the streamlined lending experience required to attract and engage the growing Millennial generation.