Behavioral analysis for credit risk assessment
Applying for a loan can be a tedious and difficult proposition, even under the best of circumstances, with applicants being forced to undergo rigorous credit checks and overcome many hurdles to obtain financing.
These challenges are even more intimidating for people with bad credit scores, as lenders see them as potentially risky when it comes to repaying term loans. These concerns could be wrong, according to Jared Kaplan, CEO of FinTech OppFi, because they can deny financing options to people who can afford to repay their loans.
“They are not necessarily low income people; they earn $ 50,000, they have a job and they have a bank account, ”he explained in an interview with PYMNTS. “But they also have traditional low credit – as measured by traditional credit scores – so they often struggle when something does happen. Maybe their car breaks down, or something medically unexpected happens, and they have to borrow because they don’t have much savings, and the traditional credit system is essentially giving up on them. .
Traditional loan approval methods designed to eliminate potential fraudsters or repayment risks do not serve these people, denying them access to financial tools that can enable them to meet their repayments. Instead, OppFi uses behavioral analysis to more accurately assess applicant credit risks and potential for fraud, enabling the company to grant loans to underserved customers.
Challenges in granting loans to high-risk clients
Emergency expenses can arise for a number of reasons. Car problems and medical bills are the most common, and the vast majority of Americans are unprepared for such incidents. One study found that only 39% of American consumers can afford an unexpected $ 1,000 bill, and traditional loan options may be of little use to those with less than stellar credit scores during these crises.
“Half of all consumers [financial institutions (FIs)] around the country, and they often make fun of their banks, ”Kaplan said. “The traditional banking world sees credit score as your control over your ability and willingness to repay, but it turns out to be quite unproductive, especially the further down the traditional credit spectrum you get.”
The inability to get loans can force consumers to turn to much riskier options like payday lenders and other predatory institutions. The exorbitant interest rates of these lenders often hamper the ability of clients to repay these loans, forcing them to engage in collections and perpetuating a negative feedback loop as individuals’ credit scores drop even further.
“When the traditional credit system abandons them, they are essentially [at the mercy of] payday lenders and other pernicious alternatives that offer credit at a pinch but certainly at a high cost on many levels, ”Kaplan said. “And then there are the markets of last resort, like auto securities lending, which go negative on your bank account and use bank overdrafts.”
Traditional credit checks and loan scans can push a large portion of consumers to seek out below-average loan options that cause them more financial trouble, but behavior-based systems can help prevent this slide into negative financials. difficulties.
Leverage behavioral analysis to secure loans
Behavioral analysis is very helpful in preventing fraud by making sure loan applicants are who they say they are, but Kaplan said the method can also play a key role in determining credit risk for creditors. clients. Even minute details like how fast they type their names could offer clues to their likelihood of repaying their loans – or whether they are legitimate customers in the first place. For example, a fraudster can misspell the name of a stolen identity or copy and paste responses from other sources.
“It is extremely important to understand a person’s degree of risk literally by how well they fulfill the [online] asks, ”Kaplan said. “How fast did they go? Did they delay on answers they should know, like their birthdays? Have they changed an answer a bunch of times? Do they use all capital letters? It’s fascinating what you can get from behavioral analysis and then use that data to determine a person’s level of risk.
Additional credit data can be gleaned by examining customers’ bank accounts, he said, but behavioral analysis systems typically give lenders all the data they need to approve or deny claims.
“You need to make sure that the consumer on the mobile device is in fact a legitimate consumer with a legitimate need for $ 1,500 to repair their car or whatever the emergency, and that consistency of income is there so that [they] can repay the loan, ”he explained. “In many cases, we ask a customer to log into their bank account and send us the last 90 [days’ worth] operations. But in cases where the behavioral analysis is strong enough, we can skip the trickier part of the process while still making sure the customer has both the ability and the willingness to repay.
Kaplan said OppFi’s behavioral analysis system has been a game-changer since its implementation. Technology can eliminate friction points during fraud and credit checks, and OppFi and its customers have reaped rewards in terms of loyalty and conversion.
“We were able to double the conversion [rate] for customers we can identify who don’t need a bank verification process, ”Kaplan explained. “Behavioral elements can be a huge process for us in ensuring customer satisfaction and conversion, as customers have the opportunity to participate in a community that has [historically been out of their reach]. It is not only the consumer who benefits; it is also the financial institution.
Large FIs dealing with higher value loans will likely require verification measures in addition to using behavioral analyzes to combat fraud and determine creditworthiness. The technology is still nascent, but all signs point to it playing a prominent role in the lending industry in the years to come.