Why the Next Lending Boom Will Be Consumer Driven

Penned by Christian Widhalm, CEO & Mike Esler, CTO

As a “boots on the ground” type of business, we talk to a lot of people. We’ve had plenty of conversations with financial institutions about the changing landscape and obstacles to effectively partnering with fintechs, especially in the credit space. We’ve also heard from consumers who don’t fit the traditional credit scoring mold. There’s the recent graduate who tried to buy a new car only to find her thin credit file (despite a 3-year history of on-time rent and utilities payments) meant she could only get a high-interest rate quote. Or the man who was recruited from abroad for a high-level technology role only to find their entire credit history slate was wiped clean once he came to the US.

On one hand, you have consumers with a history of positive financial behaviors, none of which fits into the current credit scoring models to which they’re beholden. On the other hand, you have financial institutions that hold the key to helpful data that could augment consumer credit files and give deserving people the leg up they need. We’ve found the divide in the middle is mostly a lack of technology and permission that, when combined, could solve the problems with how credit data is currently reported.

Put simply, the way in which creditworthiness is evaluated relies on an outdated system prone to errors, gaps, and limitations. As a result, many consumers have turned to credit-builder products to boost their scores and gain access to better credit products and rates. Unfortunately, these can be complicated and hard to track.

Banks and other financial institutions (FIs) are also in a bind. They are not immune from the effects of financial exclusion caused by inaccurate or insufficient reporting of credit data. They miss out on serving customers because of these credit reporting problems and a lack of product offerings for consumers with no or thin credit files. Finding ways to do this now would seemingly require an overwhelming technical and operational feat.

What’s more, the credit system is disjointed, leading to a scattered understanding of a person’s credit status. This disunity results in incomplete fixes that don’t help everyone. Even those who navigate the system with newer credit-building tools end up chasing unclear outcomes, often unsure about what information is being reported, by whom, and to which credit reporting agency.

The Credit Data Reporting Status Quo is Broken

The problem is staggering, with roughly 100 million US consumers not able to access mainstream credit products or rates. Nearly half are subprime, and the other half have no or thin credit profiles with the major credit bureaus.

Enter fintechs, offering credit builder products in an attempt to close the gap. It’s a smart move and a major competitive risk to traditional FIs who offer limited products or programs. Subsequently, FIs bleed customers who are looking for ways to improve their credit. When they find it in a fintech solution, they stick with it for the long haul, ultimately using its credit products and services.

It’s a net loss for FIs who are stuck in a no-man’s land; on one end is an unagile tech stack not built to quickly go to market with credit builder products and, on the other, an inability to fully assess customers’ creditworthiness due to the inherent flaws in the current credit reporting system.

Those inherent flaws mean data is not unified, and no one has a complete picture or understanding of a consumer’s true ability to pay. It’s cyclical in the worst way possible. Consumers have thin credit files (or none at all) and bypass traditional lenders in favor of competing fintechs that provide credit-building opportunities. That data is reported (still not consistently or accurately) to the bureaus, leading to a fractured view of a consumer’s creditworthiness. Inaccuracies in data are harmful to consumer credit scores, leading them to look for ways to bolster their scores through credit-building opportunities. Start from the beginning and repeat ad infinitum.

This says nothing of the speed issue. Credit report errors run rampant (more than one-third of consumers have an error on their report) — and consumers want the ability to fix those errors quickly. They also want the ability to reflect on-time payments instantly. Currently, the industry is operating on 30-day report cycles, with 30+ days to resolve a dispute, and consumers are not satisfied.

The Future is Bright With Consumers in Control

So, how do we bridge the gap between slow, inaccurate credit data reporting and financial inclusion for all consumers? The answer lies in consumer-permissioned data. With this type of data, consumers can strengthen their personal credit history with consumer-permissioned bank transactions (things like rent and utility payments, which are absent in most credit profiles but can be highly predictive of risk).

Credit data furnishment is often opaque and tenuous, offering consumers little insights into what is being reported, who is reporting it, and how quickly it’s being reported or amended. In an ideal world, consumers should be able to easily understand all the publicly reported data available and used in making credit decisions, including alternative data.

That’s why we believe the future of lending is consumer-permissioned data. Sunshine is the best disinfectant, and consumer-permissioned data is the best way to shine transparency and accountability down on the credit reporting space.

Consumers who can control and direct the information used to construct and maintain their credit profiles have greater visibility into what’s going into their reports. This allows consumers to provide more accurate credit data and provides lenders with more insights to make better-informed decisions.

The current problem with consumer-permissioned data is how to accurately and compliantly get the raw data from consumers to bureaus in the right and trusted format that allows traditional FIs to better serve customers who are on the path to improving credit.

Bloom acts as the translation layer on this path, offering low- and no-code options to help FIs get set up quickly and easily. FIs are the kingdom, as a historical store of valuable, alternative credit data. Consumers hold the keys to the kingdom, with the right and ability to permission that data to be used as a positive way to build credit. Bloom acts as a compliant bridge, enabling consumers to permission that data and providing FIs with a plug-and-play option for their customers to furnish that data compliantly and in the right format to all bureaus.

With a few simple clicks, consumers can gain faster, more transparent, more inclusive opportunities to access mainstream credit products and rates, despite varied backgrounds and credit histories.