How Deposit Patterns Can Guide Bankers to Better Credit Risk Decisions

An important source of alternative data has been lurking inside banks and credit unions forever. And it's an advantage most fintechs lack. Handled right it can drive increased loan volume and profitability.
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For many consumers, especially credit-focused Millennials and older Gen Zs, monitoring their credit score is a habit of semi-religious regularity. A 2020 study by Javelin and TransUnion found that almost half of Americans check their score monthly and several leading financial apps, such as Credit Karma and Credit Sesame, include credit score monitoring as a popular feature.

Consumers anxious to improve their scores scan the web for tips. They may be surprised to learn — on sites like NerdWallet — that, with the exception of extensive overdrafting, credit scores don’t reflect any of their deposit activity or balances.

On the other side of the credit coin, lenders are constantly looking for applicants who represent manageable credit risk that aren’t already receiving credit.

Hiding In Plain Sight:

Could bringing the deposit side of the balance sheet into the credit-granting equation expand the portion of consumers who can qualify for credit, potentially helping both consumers and institutions?

The Curinos consulting firm makes a convincing case that tapping data about “on-us” deposits can lead to approval of 10% to 40% of applications that historically have been turned down.

“On-us deposit behaviors are highly predictive of credit performance,” says Zachary Kaplan, Principal at Curinos. The patterns a consumer exhibits as a depositor can help lenders better understand them.

This can help traditional deposit-funded lenders in two ways. First, it can supplement what they know of an applicant from their credit data, most specifically their credit score. Second, if an applicant is a depositor at the bank or credit union, but is among the estimated 50 million American consumers who lack a usable score, it may give the lender enough to still confidently make a loan or issue a credit card.

Using alternative data to qualify would-be borrowers who don’t fit the traditional credit mold isn’t new, with even the main credit bureaus offering reporting based on payments of utility bills and similar debt. Kaplan says that depositor behavior, balances and trends represent “a huge intellectual asset.”

How Depositor Behavior and Balances Aid Credit Analysis

While millions lack credit scores, “most people do have a deposit account and likely have a primary banking relationship with a financial institution,” says Kaplan. Beyond that, as many as nine out of ten consumer loans traditional lenders make are to people who are already depositors, according to Curinos research.

Potential Insider Opportunity:

Augmenting traditional credit scores with proprietary on-us deposit records is a major boost for traditional lenders.

The idea of using deposits to supplement traditional credit evaluation is not brand new. In 2018 Experian, FICO and Finicity create the UltraFICO credit score. This opt-in service permitted consumers to formally authorize FICO to scan transactions from deposit accounts. Among the factors the service examines are whether the consumer typically has some cash in their account, how long the accounts have existed, how active they are, and how often the balance goes negative.

The idea is that this optional evaluation may enable FICO to raise your UltraFICO score based on deposit analysis. It requires the consumer to be willing to reveal deposit data to the third parties in hopes that a lender will accept their application.

This use of deposit data can help consumers, says Kaplan, but a key difference is that it’s up to each individual applicant to decide to permit their deposit data to be revealed and used. The deposits may or may not be accounts at the same institution that would grant the loan or issue a credit line or card.

Kaplan says there is some statistical bias in this process, due to the consumer’s discretion. “If you think you may not be approved, you’re willing to give whatever you can in order to increase the likelihood that you’ll get the credit,” he explains.

The approach Curinos advocates, and which it makes available as a consulting service, is evaluating depositor behavior and trends at a portfolio level and the individual level. The firm does this on the basis of a huge database consisting of information about roughly a third of U.S. consumer depositors. An individual institution could evaluate its own depositors’ patterns and behavior and get a similar sense. This can help by providing “a comprehensive view of applicants’ financial well-being,” according to Kaplan.

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Getting Into the Nitty-Gritty of Depositor-Level Analysis

Important to understand about the approach Kaplan suggests is that this is not a matter of simply finding high-balance customers who for some reason lack a strong credit score. Actually, for the most part that’s an imaginary “discovery.”

“Total deposits actually isn’t all that useful because, with the people who have higher deposits, that measure is going to be sufficient on its own to getting approved,” says Kaplan. On average, he says, consumers approved for new bankcards, for example, have an average of $40,000 in deposits at that institution and likely have credit scores that support approval already. Customers who are turned down on the basis of credit scores typically have more like $5,000 in total deposits at that bank or credit union.

Since total deposits aren’t a helpful metric, in terms of expanding approvals, Kaplan says, deeper analysis is needed.

One factor to consider is deposit stability. “How stable has their balance been over time?” says Kaplan. “You may see that they may get a large payment one month, but are then immediately spending it down.”

More important than a raw total is development of a sense of what portion of a person’s deposits is “cash flow” — money that is constantly going in and out with the usual rhythms of a household — and how much tends to stay in the account for the longer term. The latter is referred to as “discretionary liquid balance,” money that can be readily spent, as opposed to a CD, but which doesn’t ordinarily move. (Evaluating this behavior before and after Covid can help an institution sort out what effects are long-term and which are transitory due to the stimulus period.)

This is important because funds applied quickly and regularly to expenses aren’t going to be there to pay off credit card bills. On the other hand, a relatively steady discretionary liquid balance supports the ability to repay a credit card or loan, even if the basic credit score may not support approval by itself. Curinos’ modeling has developed behavioral scores that can support expanded credit approvals.

Kaplan says the firm attempts to be agnostic regarding the types of accounts deposits are maintained in, but he says the consumer’s mix of deposit types with the institution can have its own effects.

More Relationships Can Make Credit Safer:

The number of accounts a consumer maintains can establish stickiness and can be a guide to their likelihood of repaying their loan.

Longevity as a depositor also makes a difference, again in terms of stability. Given the wider availability of options available to consumers today, “it’s a little bit less predictive,” Kaplan says, “but it is still a good indicator.”

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