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The A-team: How alternate data & Account Aggregator can shake up credit underwriting

Chitwan Kaur   /    Content Specialist    /    2022-03-04

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As many as 63% of customers never finish their loan applications. The reasons for these high drop-offs are plenty, but there’s one that irks digital lenders most – complex journeys. 

Borrowers are often caught off-guard and led to believe that the digital loan journey will occur entirely seamlessly on their mobile phones. But they’re left scrounging for financial statements and bank details that aren’t readily available.

In a world where buy-now pay later (BNPL) and instant credit assure easy financing, this becomes a big obstacle for lenders. The underwriting process which should last two minutes and close with just a few clicks can, in practice, take a few hours or even days. This flies in the face of the promise of instant digital credit. 

However, help is at hand. As alternate data underwriting advances and the Account Aggregator framework is introduced, digital lenders can now build hyper-fast onboarding and underwriting funnels by enabling dynamic onboarding. 

This can be achieved by combining the prowess of alternate underwriting with immediate confirmation through AA’s formal and secure data. The result? An activated BNPL or credit line account in less than 3 minutes. 

Let’s dive in and see how this works behind the scenes. 

The two pillars of credit underwriting

If financial data helps judge the ability to pay, credit history can help gauge the intent. Digital lending has decidedly moved away from manual underwriting which addresses the ability question, and traditional credit bureau scores that reveal a customer’s intent to repay.

Alternate data

Traditional credit scores cover a limited number of behavioral parameters. They account for four or five criteria like payments history, length of credit history, number of hard inquiries, amount owed and credit mix. This effectively leaves out new-to-credit or thin file customers and makes for a narrow outlook to underwriting. 

FinTechs are perfecting the first aspect – assessing the ability to pay – by augmenting bureau scores with alternate data underwriting. In-device risk engines like FinBox DeviceConnect allow lenders to scour for cues to borrowers’ financial health such as cash flows, spending patterns, social and online activity and the nature of apps installed on their device. 

Lenders have also developed sophisticated tools to digitally analyze financial documents. They have technology like optical character recognition at their disposal to parse through PDFs, images or handwritten text. Artificial intelligence and machine learning models are also helping bring speed and scale to alternate data underwriting.

Account Aggregator

Prior financial behavior and credit history can also help judge the intent to pay. But so far, the source of borrowers’ credit histories has been bureau scores or manually uploaded financial statements. While the first is famously exclusionary and inadequate, the latter introduces leaks in otherwise seamless application journeys.

The Account Aggregator framework can bring clarity and precision to underwriting in both payment intent and ability. Financial information drawn from Account Aggregators can help cross-check alternate data collected from the device. Lenders can extract additional data points during a loan journey from a range of financial information providers (FIPs) like mutual funds, insurance providers, tax and GST platforms in addition to banks.

End-to-end encryption of data as it is transmitted from the FIP to the account aggregator to the FIU removes any scope for tampering with documents. By directly sourcing information from a variety of financial organizations, lenders can also dilute the instance of fraud and avoid adverse selection. 

For example, a borrower’s bank statement is tampered with to show robust investments, but data from their mutual fund reflects skipped SIP payments. With this knowledge, lenders can better price the loan or even drop the applicant in the early stages of the lending process.

Read: Bringing data together to transform the lending experience

Dynamic underwriting

Underwriting is central to lending. It helps lenders arrive at the loan principal amount, rate of interest, risk pricing and to formulate collection strategies. But the combined capabilities of alternate data and Account Aggregator also change the customer experience for good.

Build better confidence scores

Access to a larger, new-to-credit customer base opens up a huge market opportunity for lenders. At the same time, it also departs from the one-track lending flow of traditional banks. In the absence of adequate bureau data for new borrowers, lenders look to multiple alternate sources. This presents an opportunity to escalate the number of checks for each case until a suitable confidence score is generated in keeping with the lender’s policies.

For example, underwriting can begin with a simple credit score check. If unsatisfactory, the lender can dip into alternate device data. Should the applicant still fall short, their bank statement data and Account Aggregator data can be sought. If the borrower is seeking a larger loan amount, lenders can build confidence by adding checks like video KYC and physical verification. 

Read: How Account Aggregators will help in decreasing lending frauds

Adaptive journeys

The potent combination of alternate data and Account Aggregator provides the checks and balances crucial to lending in new-to-credit markets. But it can also do wonders for the user experience. Platforms can design adaptive onboarding journeys for various risk profiles. They can retain good borrowers (who won’t have to jump through hoops during onboarding) while also screening for bad ones (who are likely to do whatever it takes to get a loan) right at the outset.

For instance, platform data is used to prequalify two borrowers for a loan at the time of checkout. Both apply, but preliminary data like platform activity and credit score shows that one has a stronger credit history than the other. The lender puts the first borrower only through Account Aggregator checks and video KYC. The second borrower with a weaker credit history is subjected to AA, video KYC, as well as physical verification.

Read: Catch drop offs before they happen. Here’s what to look out for

Full-scale underwriting for the future

The early years of digital lending facilitated a shift from paperwork-heavy to paperless loans. The alternate data-account aggregator coalition can now launch digital lending into the next phase of its evolution — one where speed, accuracy and ease of use rule the roost. Here’s how:

  • Improving the distribution of products like BNPL beyond the metropolitan cities by enabling access to credit for thin-file or new-to-credit borrowers in the hinterlands.