As a financial institution, it’s important to understand your customers’ credit health. However, there are often overlooked areas that can hinder both their financial success and your institution’s growth.
Blind spots in assessing credit risk, like missing subtle changes in behavior or undervaluing certain data points, can lead to misinformed decisions. To help you navigate this, Forbes Finance Council members weigh in on the most common oversights financial institutions face when evaluating credit health. Here’s how they recommend closing these gaps to build stronger, more accurate credit profiles.
1. Leverage Advanced Analytics And Foster Transparent Communication
Financial institutions often overlook the nuances of customers’ financial behaviors and life events impacting credit health. They can address this by leveraging advanced analytics for personalized insights, enhancing financial literacy programs and fostering transparent communication to better understand and support their customers’ credit needs. – Appio Fragoletti, Lexington Capital Holdings
2. Utilize Open Banking Applications And Cashflow Analysis
For younger customers, as well as immigrants, the credit profile oftentimes does not reflect the customers’ actual financial health. For these customers, it can be beneficial to utilize open banking applications or cashflow analysis to get a sense of their financial situation and/or creditworthiness. – Carlo Kobe, Fizz
3. Evaluate Using Both Structured And Unstructured Data Sources
In a world where the probability of default is on the rise, financial institutions face challenges like limited data and unaccounted major life events. They must integrate both structured and unstructured data sources—such as utility payments and rental history—and continuously evaluate factors beyond traditional credit scores, like income stability and spending patterns. – Parijat Banerjee, LatentView Analytics
4. Use Context To Identify Low Credit Scores
Too many times, the bank looks at just the credit score, which may not be an accurate indicator. Wealthy people who don’t have debt actually hurt their credit score because they don’t have active open lines. Sometimes, someone who has no debt and a low credit score is ok when they have substantive income and assets that can more than replenish the debt service. – Evan Jehle, FFO LLC
5. Analyze A Customer’s Financial Knowledge And Debt Management
Financial institutions often miss critical aspects of their customers’ credit health, such as complete financial activity, life changes and spending shifts. They may also overlook customers’ financial literacy and debt management, limiting their ability to provide effective support. – Elie Nour, Nour Private Wealth
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6. Offer Access To Expert Advisors And Tools
Credit can be a touchy subject with customers. They want to understand their credit history while also keeping it private. Our team uses an app called FinLocker to help address this issue. Customers learn about their credit health and explore scenarios that could improve their scores. Expert advisors and tools like this give customers hope while empowering them to prioritize credit health. – Leo Anzoleaga, Leo Anzoleaga Group at NEO Home Loans
7. Foster Partnerships With Fintech Firms For More Advanced Data Integration
Financial institutions often overlook short-term cash flow issues and lack integration of real-time financial data. They can improve by incorporating real-time transaction monitoring, enhancing predictive analytics for short-term financial behaviors and fostering partnerships with fintech firms to utilize advanced data integration methods. – Ash Shetty, CFA, PineBridge Investments
8. Leverage Newer Credit Scoring Models
Most financial institutions rely only on credit scores, hurting those with shorter credit histories and limiting their customer base. Banks can get a broader view of a customer’s financial health by including non-traditional credit indicators. For example, VantageScore is a credit scoring model that uses alternative data like utility and rental bill payment history for more inclusive underwriting. – Monique Johnson, Beneficial State Bank
9. Assess Creditworthiness By Adopting Leading Indicators
Prioritization of “A-paper” loans continues despite the significant returns lenders can realize by helping the underserved. Financial institutions (FI) should adopt leading indicators instead of relying solely on lagging indicators to assess creditworthiness. Credit education and financial wellness tools can enable FIs to accelerate their community’s financial health while also cultivating a brand-loyal borrower base. – Lindsey Downing, TransUnion
10. Introduce A Financial Literacy Survey
Financial institutions often overlook the intrinsic motive for the credit facility and play to the gallery, and hence have difficulties recovering some of the facilities. They can introduce a psychometric survey on financial literacy that will show patterns and warning signals for the customers to ensure they understand the attendant risks of default and drive optimal utilization. – Oluwatoyin Aralepo, Mastercard Foundation
11. Search For Alternative Income, New Debt Types And Changing Habits
Financial institutions often miss key aspects of credit health, such as alternative income, new debt types or changing financial habits. To address this, they should leverage advanced analytics and include alternative data sources like utility and rental payments. A more holistic approach with personalized insights can enhance credit risk management and better support customers. – Gomathy Periathiruvadi, Alita Systems
12. Create A More Comprehensive Credit Profile
One blind spot financial institutions have regarding their customers’ credit health is not considering alternative credit data. Traditional credit scores might miss important indicators of financial responsibility. This can be corrected by integrating data like rental payments, utility bills and subscription services to create a more comprehensive credit profile. – Frankie DiAntonio, Lexington Capital Holdings
13. Leverage AI And New Technologies For A More Holistic Overlook
Financial institutions often overlook holistic financial behaviors and non-traditional credit data. AI and new technologies can correct this by analyzing a broader range of financial activities, much like a farmer using drones for a precise field survey. This enables early detection of financial distress and more accurate, inclusive credit scoring. – David Materazzi, Galileo FX
14. Implement Predictive Analytics To Identify At-Risk Customers Early
Financial institutions often overlook the impact of life events (e.g., job loss, medical emergencies) on customers’ credit health and may underestimate the importance of financial education. To correct this, they should implement predictive analytics to identify at-risk customers early, offer personalized support and provide accessible financial literacy resources. – Gianluca Sidoti, The Wealth Company International FZCO
15. Incorporate Non-Traditional Data Like Utility Payments And Rental History
Financial institutions often overlook alternative credit data like utility payments, rental history and cash flow patterns. By incorporating these non-traditional sources, they can gain a more accurate and inclusive understanding of customers’ credit health, leading to better funding decisions and broader access to credit. – Richard Polgar, CFG Merchant Solutions & CapFlow Funding Group
16. Integrate Behavioral Economics
Financial institutions often overlook emotional and psychological factors impacting credit behavior. By integrating behavioral economics into credit assessments and offering personalized financial wellness programs, they can address these blind spots. This approach supports emotional well-being and financial stability, leading to more accurate credit profiling and stronger customer relationships. – Thomas Hartmann, Funded Unicorn GmbH
17. Avoid Faulty Assumptions With More Customer-Centric Information
Sometimes financial institutions focus more on the numbers in isolation from a customer’s particular situation. Sometimes, it is as bad as not even understanding the customer’s industry or business sector. This usually leads to faulty assumptions when suggesting credit solutions. There is a need for financial institutions to understand and collate more customer-centric data and information. – Richard Okon, St Nicholas Hospital, CEO AcquireEdge Partners LLC
18. Adopt Open Banking Practices And Encourage Customers To Share Data
Some financial institutions may only have access to data from accounts held with them, missing out on information from other banks, credit cards or loans, which can provide a more comprehensive view of a customer’s credit health. But by adopting open banking practices and encouraging customers to share data from multiple sources, institutions can gain a more holistic view of their customers’ financial situations. – Bob Chitrathorn, Wealth Planning By Bob Chitrathorn of Simplified Wealth Management
19. Leverage More Up-To-Date Reports Over Lagging Indicators
Financial institutions often use credit scores from Equifax, Experian and TransUnion, which are lagging indicators. These scores show delinquencies and negative remarks after the fact. Changes in creditworthiness are not reflected for at least one billing cycle. Institutions can address this by using more up-to-date reports and asking consumers to regularly certify employment status and balances. – Zach Brody, Lumiere Financial
20. Use Context Clues To Shape Recommendations
Investment advisors are rarely concerned with a client’s credit, as this doesn’t directly impact the investment protocol. However, credit may illuminate spending and savings habits that do impact cash flow and liquidity needs. For example, a low credit score may indicate that a client doesn’t have sufficient cash savings to pay bills on time. In context, this may shape an advisor’s recommendations. – Ryan Loynd, BrightGuide Financial
The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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