LexisNexis Risk Solutions research reveals that as traditional credit data provides less visibility into consumer risk, financial institutions worldwide increasingly leverage alternative data in the consumer lending process.
The findings of LexisNexis Risk Solutions’ inaugural Global Consumer Lending Confidence Report, conducted by Datos Insights, show that lenders are becoming less confident in relying solely on traditional credit data for consumer lending decisions.
Namely, 59% of global lenders are less optimistic about making competitive consumer lending decisions with conventional credit data alone than a year ago. On the other hand, 86% of respondents admitted they were more confident when making consumer lending decisions based on alternative credit data compared to last year. Non-conventional data is increasingly used for pre-screen marketing, loan origination, portfolio management and collections.
Most (78%) of respondents reported challenges attributed to limited visibility into consumers’ negative payment histories. About 66% of respondents are considering enhanced use of alternative credit data to improve credit risk assessments, address gaps in traditional credit data and make more reliable lending decisions.
Moreover, 97% of global lenders cite delinquent loan collection as their primary challenge. A large share (40%) of respondents have seen an increase in delinquencies over the past 12 months. Almost all (91%) global respondents expect delinquencies and defaults to remain at the same level or even increase over the next year.
Therefore, financial institutions worldwide are looking for more effective methods to predict risk, increasingly turning to alternative credit data to complement the traditional methods they have relied on for decades to assess consumer credit risk.
Other challenges financial institutions face in their consumer lending journeys are attracting new qualified borrowers, retaining existing customers and accessing and using external data. With evolving regulations, a rise in the use of non-reported financial products provided by third-party fintech companies leads to shifting credit reporting practices. This way, the predictive accuracy of traditional credit data may be declining.
The study surveyed representatives of 434 financial institutions across nine countries, including the United States, Colombia, Mexico, South Africa, India, Italy, the Philippines, Spain and the United Kingdom.
Another technology used to facilitate consumer lending is artificial intelligence (AI) which can streamline many processes to reduce the time and effort of the financial institution’s employees, increase lending efficiency and boost decision-making productivity.
