Alternative Data Can Help Credit Unions Target New Members

August 30, 2017 Miranda Glancy

Alternative data can help Credit Unions target new members in the unbanked space, and deepen existing member relationships

To attract new members, credit unions typically analyze financial data and credit profiles. But many credit union professionals are beginning to realize that they need to take a new approach — one that goes beyond traditional credit analysis. Limiting data collection to bank history and credit reports doesn’t provide a complete picture of household finances. Credit unions are now turning to alternative data sources to broaden their view and improve both the quality and quantity of their member relationships.

Finding hidden revenue opportunities

Lack of a credit history commonly results in a low credit score for the younger generation, as well as for households that have operated primarily on a cash basis. The traditional credit reporting system doesn’t always give the most complete picture of those who have had little opportunity to establish their creditworthiness and those who choose to avoid paying for purchases on credit. Unfortunately, when credit unions limit their analysis to traditional credit scores and credit history, they may miss a significant group of consumers in their marketing efforts — the financially responsible individuals and households who don’t fit the standard consumer mold. These people fall within a consumer segment that is sometimes referred to as “unbanked” or “underbanked.”

The actual numbers for unbanked consumers are surprising. It’s estimated that up to 26 million adults don’t have a credit file on record at the top three credit reporting agencies1. This represents roughly 13 percent of the U.S. population, a potentially huge new audience for credit union services.

Detecting potential risks in disguise

Just as traditional credit data can exclude some financially stable consumers, it may also present a lagging picture for consumers that are just beginning to default and show signs of higher risk. This is especially true of the credit-savvy consumer who understands what is reported to traditional consumer reporting agencies and how that is reported. A traditional credit score or report reflects “a snapshot in time” of a consumer’s credit health at the precise moment when the report is requested. Given the potential for gaps between when lenders report their data and the types of data reported, it is quite possible for individuals to hide their downward financial slide for a period of time in order to gain access to fresh financial resources.

By limiting credit-data collection and analysis to a traditional scope, credit unions can negatively impact the quality of their portfolios and potentially increase their loss exposure.

Using alternative data to refine your target market

Broadening your information gathering to include data related to the unbanked and underbanked demographics in your area can be the initial step in refining your target market. A good place to begin is at JoinBankOn.org, which provides estimates of the unbanked and underbanked households in your local area.

Once you’ve established the size of the market, the next step is to seek a reputable source for your alternative data and establish risk-assessment criteria. One source available exclusively through Equifax includes alternative account payment data for utilities, pay TV and telecommunications accounts. It reveals how people pay their “everyday bills,” which has proven to be highly predictive of future account performance. This type of non-financial payment data isn’t typically included on a traditional credit report, so it can offer another layer of insight that helps credit unions better understand prospective members—particularly those who lack a traditional credit file.

Taking a second look at current members

In addition to improving the quality of your new members, alternative data can and should be used to assess your existing member base. A deeper, more personalized analysis provides an opportunity to increase your level of service to current members who may have been overlooked using conventional data analysis.

For example, better understanding a member’s payment behaviors can enable you to more easily identify and target upsell opportunities that help expand basic member relationships—beyond demand-deposit and savings accounts—to include additional offers for bank cards, auto loans or a home equity line of credit. Likewise, a closer examination may also bring potential risks to light more quickly, which will allow you to take proactive steps to minimize your exposure and preserve member relationships.

Both of these activities—informed, targeted upselling and proactively working with members to address and resolve risk—can also help to increase the lifetime value of member relationships, and deepen their member loyalty.

Alternative data is key to future membership growth

Traditional credit data remains the foundation of member risk analysis, but more credit unions are recognizing the value of alternative data, as it can help to dramatically expand their view of new and existing members. You can confidently target a wider audience of new members, particularly those with little to no credit, while also mining your existing member base for revenue opportunities that were overlooked at account opening, which can help to deepen current relationships. Contact Equifax for more information about alternative data sources that fit the unique needs of your credit union

1https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/BecomingCreditVisible_Data_Point_Final.pdf

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