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Understanding the millennial borrower through alternative data

Guy Shand - August 17, 2017

Understanding the millennial borrower through alternative data

At this moment in time, it’s millennials pursuing higher education or looking for their first home loans. And, yet, this generation finds it difficult to borrow money and obtain financing.

There are a myriad of reasons why it’s difficult to provide loans for millennials, including the stagnation of traditional lending parameters. Despite a move to online banking, these institutions haven’t kept pace with the technology demanded – and the subsequent expectations – of millennial borrowers.

According to the FDIC, approximately 35% of 25-34 year olds are unbanked. Additionally, TransUnion reports that 43% of millennials are subprime and eligible to only receive loans with high interest rates.

While the challenges extend to the international loan market (or rather, cross-border borrowing for education or similar endeavours), it begins at home – within the context of most national banking systems.

The limitations of current domestic and international lending practices

According to TransUnion, 73% of worthy consumers don’t have access to credit and 59% of people lack access to financial services.

These limits, along with the high rates of unbanked and subprime individuals are linked, in part, to the need to already have credit in order to receive credit. This cyclical cycle is often labelled as ‘undemocratic financial services’ and it’s definitely spiraling faster than ever before.

Credit-invisibility makes it difficult to purchase those homes and invest in education. And this is in countries with strong credit reporting systems; it’s not universal. Some countries still don’t have a credit bureau industry, or if they do then it’s yet to mature.

Even in countries with established practices, the accuracy of scores is still limited. Many good scores cannot be separated from poorer ones, making it unfair to borrowers looking to invest in their future.

Following the economic crisis, many banks have withdrawn from certain types of loans altogether – including financing for postgraduate education. And, that’s within the domestic market; banks are unable to lend internationally – even to top students. They just aren’t structured to provide foreign risk, nor are they enabled to enforce repayment across borders.

Consider too, that credit bureaus don’t think or act globally, even when connected to the same parent organisations. So, even when they have excellent credit, international students experience funding problems; those from emerging economies are particularly affected. 

At Prodigy Finance, over 78% of our students come from emerging markets – and over 80% of our student borrowers have no alternative funding options. Needless to say, this is incredibly close to our heart.

Why are so many millennials turning away from traditional banks?

On the one side, banks aren’t structured to provide financing across borders or provide loans without a credit history. On the other side, after the financial crisis, millennials are less likely to trust traditional institutions

Millennials want a partner in their finances – and not just a loan provider. Though brand recognition remains important, they often turn to fintech startups which simplify processes, and work on shorter time spans.

Additionally, millennials interact with their finances differently; they prefer online, immediate institutions and have an increased need to engage. The desire to rethink traditional methods and practices expands far beyond online shopping and social media; the millennial generation requires a different banking practice.

As this generation turns away from traditional lenders which require hard and strong credit risk profiles to sell their assets, it’s worth considering whether alternative data would position alternative lenders to provide for millennial better.

What are the different types of alternative data?

Alternative data isn’t false data; it remains quantifiable and includes utilities bills, telecoms information, rental and housing data, asset record, public record, alternative lending payments, and information from mobile wallets (Apple Pay).

And there’s no reason not to extend beyond these spheres; it’s entirely possible to consider using social media data, such as LinkedIn to verify employment data. Just as Yelp reviews of businesses, to show how financially stable they are, it’s possible to use these networks for individuals. Additionally, it may be possible to use social media and online footprint scores to uncover factors linked with higher or lower default rates.

What are the problems with using alternative data?

Of course, alternative data isn’t full-proof. After decades of banks loaning to members of their communities based on reputation, they eventually turned towards hard metrics and clearly demarcated formulas.

Applicants can make a fake profile much more easily, leading data integrity issues – and the loan industry as a whole relies on trust and accuracy of data. Additionally, alternative data provides a comprehensive view of borrowers, which could harm their chance of getting a loan. For example, as more factors are publicised such as ethnicity, there is an increased likelihood of discrimination based on these elements.

Plus, there is still a demand for traditional credit bureau data and other forms of credit data. Being entirely reliant on alternative credit is a massive business risk and potentially a business constraint depending on what capital is required.

And, while there currently isn’t enough data on alternative data, it’s possible that legislation could, in a single set of laws or guidelines, eliminate this sector entirely.

But, there are reasons to alternative data to service the millennial market

As lenders look to target a broader geographic population, they are finding it is more efficient and cost-effective to connect with these groups online than in person. This shift makes alternative data even more critical as lenders seek to gather the same type of intelligence on online consumers that they traditionally gathered in person.

The process of putting together a full picture of the borrower, not just their credit report, including their intended place of study, employment, future prospects, can be good for both loan originations (credit risk evaluation) and loan servicing (collections and arrears). With more current information, tracking, tracing and forewarning naturally becomes easier. It’s possible too, that alternative data can be used to predict future borrowers – and expanded customer bases as it becomes easier to reach demographics that were un-contacted previously.

Alternative data is believed to enhance accuracy through better risk separation. And, the deeper, more analytical view of the consumer allows lenders are able to offer more competitive rates. This, in turn, leads to more profitable loans with lower lending costs.

Finally, it’s never solely about the lending institutions themselves. Loans don’t exist without the desire for individuals to invest in education, live in a secure and comfortable home, or purchase items that allow them to work smarter or enjoy their lives more.

As millennials represent the future of economies across the globe, there is a need to bring them into the formal financial sector on favourable terms so economies – especially emerging ones – can sustain themselves and grow to accommodate future populations. Alternative data provides an avenue to banking the unbanked and offering consumers financing options (beyond subprime) without longstanding credit scores – or across borders for development on personal and community levels. 

Want to learn how Prodigy Finance is shaping fintech's future?

Since 2007, we've been changing the international student loan market. Along the way, we've helped transform the fintech industry.

Prodigy Finance Ltd is authorised and regulated by the Financial Conduct Authority. 

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