Data, Sponsored

How we can stop using the term ‘financial inclusion’

  • Our current credit system has led to decades' worth of errors and financial exclusion.
  • But as consumers get more autonomy in their financial decision-making, lenders may have to finally change their ways.

Email a Friend

How we can stop using the term ‘financial inclusion’

By Sarah Davies, Chief Data & Analytics Officer, Nova Credit 

This is the second of a three-part series addressing some of the major challenges in our current credit system – and how we can fix them.

When we think about financial inclusion, we often think of consumers that fall outside the realm of mainstream credit, who are considered higher-risk from a mainstream perspective and far from creditworthy.

The reality, though, is that these consumers simply don't have enough data on financial behaviors which the consumer credit risk industry deemed important in the '90s to determine creditworthiness. And because the industry automatically considers them higher-risk, these consumers aren’t eligible for fair access to financial products.

But the truth is that consumers produce financial data all the time – just not in the original and outdated qualifiers for creditworthiness and the ability to pay back debts. 

This is where the term ‘financial inclusion' has come in. 

Our industry has created this type of terminology to describe all these consumers that fall outside of the creditworthiness paradigm. 

But while the term helps describe the problem, it doesn’t solve it. The solution, rather, is something that’s happening right under our noses; with the advent of new data and new analytics techniques, we could potentially solve the problem of financial exclusion and no longer need to use the term ‘financial inclusion’.

But as an industry, we've yet to truly embrace these newer data sources, and are still holding on to old paradigms and systems. 

So who’s considered a ‘financial inclusion’ consumer?

Out of approximately 240 million consumers with information sitting in the credit files, about 180 to 190 million consumers are considered mainstream creditworthy, by having what we would call a ‘mainstream’ or ‘thick’ credit file. This means they have at least two trades and update their credit very frequently within a six-month window. 

The rest of the consumers have diminishing levels of information on their credit file.

Of those, 20 to 30 million have thin or sparse credit files, meaning they have at most two accounts, like a credit card in one hand and a student loan in the other.

After them, there are around 10 to 15 million infrequent credit consumers, who may have multiple accounts but don't update credit very frequently. 

Except for the ‘mainstream’ group of consumers, the rest are people who fail to get scored within mainstream credit scores like FICO, effectively qualifying as ‘financial inclusion’ consumers. As a result, around a quarter of US consumers are locked out of the credit system.

The problem with mainstream data and creditworthiness

The original DNA of the financial service system was established over 30 years ago. Since then, we’ve seen changes like the rise of BNPL due to market demand from younger generations who don't relate to the traditional credit system; financial inclusion initiatives iterating on the existing paradigm; or the creation of VantageScore, built on similar credit data as the FICO score.

While some would consider these adaptations, they are only addressing symptoms and not the core problem, which is that both the model and data of creditworthiness were established in the '90s, leaving much of the modern consumer out of the equation.

FICO credit scores are embedded within almost all institutions, and indeed are very effective. The problem is that this is a statistical algorithm that requires a certain amount of data on specific behaviors in order to calculate the score. In other words, if you don’t have enough of the right data, you don’t get a FICO score.

In a way, the system is quite similar to a Russian doll: once you open the various layers of the doll, and you get to the very central part, you see that it is highly predicated on this particular algorithm that requires just enough of the right data. 

Bottom line

We need to move out and move on. This means embracing more expansive credit risk models, new data sources like bank data and cash data, and new technologies. Who knows – maybe then we could actually be financially inclusive.

0 comments on “How we can stop using the term ‘financial inclusion’”

Sponsored, The Customer Effect

Voice of the Customer: How “active listening” drives meaningful consumer engagement

  • Successful bankers act on feedback from their customers in relation to in-person or digital experiences, as consumers hold the key to improving how financial institutions conduct day-to-day business.
  • Today’s consumers have very little patience for financial institutions that do not place them at the center of the customer journey. Ignoring feedback from critical customer journey key points can drastically impede customer acquisition and retention.
Argo | January 19, 2023
Banking, Sponsored, The Customer Effect

How one bank is successfully building deeper customer relationships through digital customer engagement

  • Despite the gains in convenience and capability that digital channels offer, bankers and their customers are missing the relationship aspect of banking. People still want to connect with people.
  • Banks are now shifting their thinking beyond simple “digital transformation” toward “digital customer engagement” and how to leverage the digital channel to support more meaningful customer interactions.
Agent IQ | January 03, 2023
BNPL, Sponsored

How financial institutions can design a balanced BNPL solution

  • Current BNPL solutions have been better at facilitating the "buy now" part than fulfilling the "pay later" aspect.
  • Financial institutions have access to valuable insights that they can use to better understand consumers and tailor BNPL solutions to their specific needs.
equipifi | December 19, 2022
Data, Sponsored

How marginal improvements in data strategy can yield tremendous results

  • The truth is brutal: data is hard, and most people don’t understand it.
  • Here's how marginal improvements to a company's data strategy can have a profound impact.
Quantalytix | December 14, 2022
Sponsored, The Customer Effect

Mobile banking outlook for 2023: Why push notifications are more important than ever

  • Mobile banking usage is quickly growing in popularity as account holders are afforded 24/7 access to their finances and enhanced ease of use.
  • Push notifications enable financial providers to take advantage of this surge by driving account holders to their mobile banking apps and increasing customer engagement.
Larky | December 02, 2022
More Articles