Risk & Growth: Two Sides of the Same Coin

In a recent article in the Financial Brand, Dr. Wendy Smith, the Dana J. Johnson Professor of Business, faculty director and co-founder of the Women’s Leadership Initiative at the University of Delaware advised banking leaders to steer between competing priorities – such as growth vs. risk, or innovation vs. stability. Her message: Stop thinking in terms of either/or and embrace the promise of both/and.

She explained that companies, especially financial institutions, with the courage to embrace this mindset can simultaneously unlock new growth opportunities while still playing to their existing core competencies. 

Some institutions have adopted this attitude already by exploring creative ways to drive loan growth in a challenging economy. What do these strategies look like and could they inspire your own financial institution to capture unrealized market share? 

Alternative Measures of Creditworthiness

While traditional credit scores are still the basis for most underwriting decisions, some financial institutions and lenders are turning to other forms of evaluating creditworthiness to offer more loans without taking on excessive risk.

For example, cashflow data has been touted as the way to gain a more complete and accurate view of a consumer’s financial life. Cashflow data may include income-stream consistency, balance trends and discretionary and nondiscretionary spending, among other information. Timely payments of utilities, telecom and rents may also provide alternative measures of creditworthiness. 

Another article in The Financial Brand suggested that these alternative sources of creditworthiness could even be a boon for small business lending. Small businesses often self-fund and have little or no borrowing history, which makes it difficult to evaluate creditworthiness. Alternative sources of data can help close those gaps and even help financial institutions pinpoint opportunities to expand relationships with customers who already own a business, but may only have a personal account with their bank. 

REACh for New Credit Opportunities

A recent ABA Banking Journal article discussed how the Office of the Comptroller of the Currency’s (OCC’s) Project Roundtable for Economic Change (REACh) is exploring cash flow analysis and other alternative credit assessment methods to broaden access to credit U.S. residents with weak or non-existent credit scores, estimated to be 50 million people.

For the most part, only the largest lenders have participated. JPMorgan Chase in particular has seen great success by analyzing the money coming into and leaving an individual’s checking account. Over the last five years, the bank has reviewed customer cashflows to assess existing customers’ creditworthiness and determine whether to extend a credit card offer. More recently, the bank launched a pilot program that does the same for prospective borrowers who are customers of other banks. 

Today, the program accounts for a large piece of the bank’s portfolio. Additionally, the bank reports that these cashflow-approved accounts perform similarly to the average customer with full credit files and traditional credit scores, demonstrating the potential of alternative credit criteria. 

AI’s Assist

As the two examples above show, a critical component to expanded lending opportunities without taking on excessive risk is having the right data, as well as the right controls in place for leveraging it. 
The amount of data generated each day is only going to increase, with structured and unstructured data available from a growing number of sources. Additionally, artificial intelligence (AI) enables financial institutions to clean, process and organize that data more quickly and efficiently.

But simply having more data isn’t enough, Anna Garcia, Altari Partners founder and managing partner, noted in an American Banker article.

AI or any machine learning automation that is used to process data for underwriting or credit decisioning should always incorporate the bank’s credit policies and fair lending practices to determine how each credit request should be reviewed and decisioned.

In addition to sound credit policies, AI and similar tools require good data and sound decisioning logic to generate accurate and compliant outcomes. The outcomes will only be as good as the data and parameters that feed into the model, which means the right technology integrations and relevant data sources will be crucial.

Define Your Path & Your Potential

Though traditional measures of creditworthiness are still the standard, the ever-increasing volume of data generated each day combined with the latest advancements in technology already presents new opportunities for today’s banks and credit unions. Those that embrace the possibilities and have the courage to chart a path forward will come out ahead.

Author Bio

Baker Hill empowers progressive financial institutions to increase revenue, reduce risk, and drive more profitable relationships.

Streamline business, consumer direct and indirect lending with our common origination platform. Understand profitability and risk at every level with our sophisticated business intelligence and analytics. Monitor and maintain a healthy financial portfolio with our statement analysis, exception, and risk management solutions.

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