Financial exclusion is a significant issue, particularly here in the UK. It results in many people finding it difficult it difficult to access basic banking services or facing severe restrictions on the financial products they can use - many of which most
of us take for granted.
According to the Financial Inclusion Commission, more than 1.5 million adults are unbanked, unsecured consumer credit has tripled since 1993, and half the households in the bottom half of income distribution have no savings to fall back on.
Often, financial exclusion can be a consequence of having little or no credit history or identity information available. These people are termed as having ‘thin’ or ‘non-existent’ credit files.
Experian research estimates that there are currently 5.8 million adults in the UK in this position, meaning they will have limited or no access to formal credit options. They are
‘Invisible’ to the mainstream credit economy.
With little or no information available to make an informed decision, lenders consider the
‘Invisibles’ to be high risk and so can only offer them financial products at higher rates, if at all. More than a million thin-file customers live in households where total incomes are expected to decrease, making them particularly vulnerable to higher
borrowing costs when they may need credit the most.
New data sources: How can they help the 'Invisibles’?
‘Traditional’ credit data is provided through cards, loans, mortgages and current accounts. New data sources, meanwhile, provide additional insight, visibility and transparency about all consumers, including their identity and payment behaviour.
Non-traditional data sources are growing in importance given the rapid and ongoing evolution in the way people manage their money, transactions and credit. For the individual, using alternative data has the potential to help expand responsible access to
credit for people who lack the traditional information to strengthen their credit history.
Our research shows we have already started to reduce the ‘Invisible’ population through our work with The Big Issue Invest on the Rental Exchange. More than 1.2 million tenants now have rental information on their Experian credit reports and we expect
79% to see a noticeable improvement to their credit histories as a result of this new data.
By adding further new data sources such as data from utility companies, along with Open Banking information, more than 1.5 million people could become financially included.
At a time when competition is tougher than ever, financial services firms need access to the largest possible customer base. Consumers with thin or non-existent files are a valuable opportunity, and 5.8 million people are simply too significant to ignore.
In many cases, these are creditworthy individuals who are being passed over due to eligibility requirements rather than their ability to repay the debt.
Getting access to enhanced information about such consumers would, in turn, reduce the need for marginal declines - people narrowly rejected for a credit card or personal loan, but who are unlikely to default. We estimate that this group represents a further
2.5 million ‘thick-file’ customers (88% of whom are unlikely to default).
They contribute towards an even greater total of 8.3 million people suffering from some form of financial exclusion.
Importantly, these individuals are currently paying more than they might for financial products due to their lack of credit history. Access to data on this group’s financial behaviour would allow companies to deliver fairer, more affordable solutions. It
would also lead to a better customer experience, with lenders able to make more informed, more appropriate decisions.
Finally, the ability to see and understand more about the true creditworthiness of these individuals would enable companies to generate additional business and loyalty, without adding risk to their business.
What organisations need to do now
- Assess your organisation’s view of its customers. What information could help you to get a more complete view of your client base?
- What information does your business share with other organisations? If you share data with other providers it could help people get improved access to services.
- Which groups are you under serving? Whether groups of people are not on your organisation’s radar at all, or currently marginally declined, new data sources could be the answer to make better decisions.
New data sources can help businesses make more appropriate decisions about affordability to lend responsibly and keep up with changes to our society. They can also authenticate their customers securely, quickly and digitally to meet with demand for a seamless
customer experience in a hyper-connected world.
Adding new data sources would both strengthen our collective understanding of individuals’ circumstances and reduce the number of ‘thin’ and ‘non-existent’ file individuals in the UK.