For decades lenders have embraced first-party data in fraud prevention yet overlooked its value in assessing credit risk — until now. Tom Oscherwitz, US Legal Counsel, asks why.
Lenders are constantly searching for the next hot data source to give their lending algorithms a boost.
But one easily accessible source remains relatively unexplored. Gathered directly from consumers, it offers lenders unique and material insights and it's called first-party data. I can say this with certain authority because I’ve witnessed its power in detecting fraud and credit risk up close.
In March of this year, after almost a decade at the Consumer Financial Protection Bureau (CFPB), I joined Aire. The company’s mission is to make credit equitable for everyone: allowing consumers to share their own financial situation with lenders to deliver credit where it’s due.
But this is not my only encounter with first-party data. I originally saw its raw power at the turn of the millennium.
First-party data at the US Senate
I had just started working for California Senator, Dianne Feinstein, serving as her counsel on the U.S. Senate Judiciary Committee. Part of a counsel’s role is to identify problems legislation can address. I heard about this emerging crime of identity theft. Just several years before, Congress passed the Identity Theft Assumption and Deterrence Act of 1998, making it a federal crime with a maximum 15 year sentence.
But despite the law, identity theft was surging. By 2001, it had become the top consumer complaint to the Federal Trade Commission (FTC), at 85,000 cases, and was still climbing.
Advocacy groups told me that consumers lacked tools to protect themselves from this scourge. I read deeply moving letters from constituents about how fraudsters obtained and abused credit cards and loans in their name, creating havoc in their personal lives and a financial mess on their credit reports.
At the direction of Senator Feinstein, I drafted a bill named the Identity Theft Prevention Act. The bill proposed key protections leveraging the power of consumer (first-party) insights. It entitled consumers to one free credit report per year so they could easily check their file for mistakes. It codified consumers’ ability to request fraud alerts, and it required the FTC to develop model identity fraud affidavits. The bill also enforced the printing of only the last five digits of credit card numbers on receipts by merchants.
The value of consumer insight
Each of these provisions relied on a common insight: consumers have valuable information that can curb fraud. An individual will uniquely know if their credit file has fraudulent accounts, if another consumer’s information is mistakenly on their file, or if a debt collector wrongly reported a debt they don’t owe.
These key concepts of Senator Feinstein’s bill became part of the Fair and Accurate Credit Transactions Act of 2003 (FACTA) and are now baked into the credit reporting ecosystem. This success remains a highlight of my career. The industry now, quite rightly, sees consumers to be powerful and uniquely well-positioned partners in fighting fraud — by placing the consumer at the center of the issue, we improved the outcome for everyone.
A half-told story
But using first-party data to stop fraud is a half-told story.
Consumers can take a more active role than just finding errors in credit files and credit card statements. They can tell lenders directly about their financial capacity and willingness to repay debt. Most importantly, they can offer up their own individual circumstances to improve their credit outcome.
Why? Because just like in fraud prevention, consumers are uniquely placed in the credit journey to share important information about themselves that other sources just can’t.
Here are just a few ways where first-party data supports the positive side of the credit ledger:
1 . Timely insights, even in periods of great instability
The economic fallout of COVID-19 has reminded us how precipitously consumer finances can change. Over a matter of weeks, entire sectors of the American economy cratered, leaving millions of Americans suddenly and unexpectedly out of work or with uncertain future prospects. Stimulus payments, unemployment insurance, and payment holidays have made it difficult for lenders using traditional data (with its 30 to 60 day lags) to distinguish consumers who are in trouble and need help from those with sturdier finances.
In contrast, first-party data, by going directly to the consumer, can do this immediately. Have they kept their job? If they are on furlough, will they return to work? Did they take a temporary or permanent salary cut? First-party data helps lenders meet consumers where they actually are financially.
2. Serving those missed by mainstream credit solutions
First-party data can provide visibility to the millions of consumers underserved by mainstream credit. According to the CFPB, 45 million Americans have no mainstream credit file or such sparse information in their file that they cannot get a credit score. With first-party data, any consumer with access to email or a smartphone can share their financial story.
Similarly, first-party data offers tailored ways to understand the vast cohort of workers who participate in the gig economy. Traditional solutions do great at predicting income of consumers with bi-weekly paychecks who are willing to share their banking credentials. It’s a harder task when they have three part-time jobs with variable income streams. First-party data does well here, capturing the individualized financial story of the consumer.
3. Light touch to meet the needs of consumers who expect instant credit
Consumers can also engage with a lender quicker and more conveniently through first-party data. Gathered via a simple SMS or email prompt, they can share needed information by answering a brief set of questions in two or three minutes. No forms and no documents are required for submission. This is particularly useful for fintechs who are looking to discourage excessive friction during credit applications.
4. Revealing consumer intent
First-party data unlocks categories of credit insight unavailable anywhere else. It reveals the intent of consumers: how do they feel about their own finances, their future job prospects, their financial health? With this insight gathered, truly holistic, forward-looking pictures of the individual can be used to make the right decisions about them today.
5. Building a continuous relationship
This is also a crucial tool in helping lenders to develop truly consumer-centric business models. A lender can use first-party data to build an ongoing relationship with their customers and better service their current and future needs.
The results are not foolproof. Like any other data source, first-party data can be inaccurate. Some consumers may overestimate, underestimate, or simply forget aspects of their finances. In other cases, consumers may have incentives to inflate their financial resumes.
But, most importantly, first-party data represents a vast and unexplored resource that is uniquely placed in combating many of the unsolved problems in consumer credit. And that’s where Aire comes in.
Gathered directly from the consumer, Aire provides rapid, actionable insight to advance credit-decisioning for lenders, empowering major banks and financial institutions — as well as the consumers they serve — with fairer insight.
We know that our partners are already finding orthogonal benefits in using insights from Aire to understand their customers more effectively than ever before.
And, if you’re a lender, you need to ask yourself: if I rely on consumers for fraud data, shouldn’t I rely on them to tell me about their actual financial circumstances?
Access our guide for US lenders to first-party data to find out more: what it is, why it matters and how we all stand to benefit, here.
