How Digital Finance Is Changing The Credit Game In The Covid-19 Era

By Patrick Moorhead - April 19, 2021

According to Fidelity National Information Services (FIS), there was a 200% jump in new mobile banking registrations in early April 2020 and an 85% increase in mobile banking traffic. Deloitte has reported online banking activity increased 35% since the pandemic started. These trends have only gone up and to the right as the global health crisis has lingered. 

Banking activity aside, the economic fallout of the pandemic has been disparate. Many are struggling financially, while a significant minority have likely found themselves with more disposable income than before the pandemic, thanks to the stimulus checks. Despite the overall economic decline, the average credit score in the U.S. climbed 1% (seven points) in 2020, reaching a record-high score of 710, according to Experian data from Q3 2020. Compared with the average growth seen over the past ten years, 2020’s increase was unusually high.

Cory Ayres, VP of Experian Partner Solutions, shared his take: 

“The pandemic impacted demand for credit differently across products. While overall demand is down when indexed to 2019, demand for auto and mortgage was strong throughout 2020 and is starting 2021 higher than our 2019 benchmark. While bank card and personal loans remained down throughout 2020 and the first month of 2021, the two are trending up.” 

Ayres believes the strong demand for cars and housing, along with the nearly $2 trillion stimulus will continue to drive overall market activity, along with demand for credit, back to 2019 levels and beyond. As further evidence of this, overall originations have started to climb back to 2019 levels, with bank card and personal loans making notable gains in the last months of 2020.

Despite this somewhat surprising rise in credit scores, many have still been affected adversely. With many Americans already facing job losses and economic insecurity during the pandemic, reports of credit reports errors have also increased. Complaints to the Consumer Financial Protection Bureau about credit report errors have reached record levels, according to the U.S. Public Interest Research Group, a consumer advocacy and policy organization. Much of this was due confusion around legislation in the CARES Act, which allowed deferred payments, mortgage protection and other measures, which were then erroneously reported as late.

Andreessen Horowitz estimates businesses of all kinds are experiencing at least two years’ worth of digitalization compressed into months during the first several months of the pandemic. Innovation wasn’t just necessary; it was urgent. FIs and Fintechs had to do everything at once instead of building products on top of each other (such is the practice with traditional roadmaps). From mobile offerings to call centers, FIs had to scramble to provide more robust digital products in short order to maintain a competitive advantage while consumers quickly migrated to digital banking. 

The compressed financial innovation during Covid 19 should be music to commercial and retail credit institutions' ears. Digital technologies brought on by Fintechs, APIs, mobility, AI, big data analytics and more enables traditional lenders to deliver hyper-relevant lending experiences with optimized data-driven insights. Consumers benefit from online originations, quicker decision-making and processing and often no paper. During the pandemic, Notarize, a remote online notarization provider, reported a 263% growth in retail transactions between consumers and notaries and an 826% growth in its real estate business, illustrating a digital migration across the board. 

Other notable trends affecting credit during the pandemic include the shift from cash to digital payments, Fintechs that offer no credit check loans, myriads of payment options and other ways to obtain goods and services with no effect on credit scores. All of this concludes that many of the traditional data inputs that previously informed credit underwriting models may no longer paint the complete picture of a consumer. 

Like many financial services, the credit industry has historically been slow to adopt new technology or innovate past the traditional FICO score, mainly because of the complex legacy systems and accompanying regulatory oversight. However, to compete with Fintechs, the credit bureaus must innovate to stay relevant. 

This past week, I sat on a panel at the Lendit Fintech Conference with Cory Ayres (quoted earlier) to discuss these trends. We spoke further about how Experian, often thought of as an old-guard, conservative company, is approaching the Fintech world and keeping innovation alive. Ayres heads up sales for Experian Partner Solutions, which hails from the venture-backed startup world. The company was born from the combination of Experian Affinity Services and CSID, a credit data and identity management solutions startup based in Austin, TX, which Experian acquired in 2016. He explained that Experian Affinity Services’ history in the tech startup space enabled the company to innovate beyond the traditional constraints of the industry. “Disruption and innovation is in our DNA, and we apply that to a legacy industry,” Ayres said. “As such, we can create opportunities for our partners by enabling them to offer services that engage, retain and monetize customers.” 

The company helps create better outcomes for consumers by providing comprehensive identity protection technologies and services. Experian as a whole now has some consumer-facing fintech products that are challenging the traditional notion of a credit bureau. The company’s Boost product and some white-label products for companies like Chase demonstrate that a legacy industry can innovate. 

Technology roadmap compression was rampant in the first half of the pandemic. Meanwhile, demand for credit is on the rise and consumers will expect the technology and process changes that have made the customer experience better to maintain and improve. This rushed, horizontal expansion must also ensure financial security and education. Financial literacy—not only about your credit score, but ways to future-proof through savings, investments and other tools–are paramount to reentering a post-pandemic world.

As consumers and lenders grapple with that, Ayres also has his eye on a post-pandemic recovery for SMBs, who, along with consumers, will be re-entering the market as well. He emphasized the importance of telling prospective customers “not yet, but soon” instead of flat-out declining loan applications. “Through credit education and financial health engagement, in a few months, this customer is now able to be underwritten,” Cory explained.

For lenders, this means looking at portfolios through a new lens—assessing exposure due to the health crisis and whether models and lending criteria will work adequately to help meet post-recovery lending goals. Alternative data, such as education, employment and rental longevity, spending and savings behaviors, all support the ability to see a customer’s entire credit portfolio and deliver more robust decisioning strategies. 

Innovation and competition will always also serve the end consumer. Upstart, an AI lending platform, seeks to improve access to credit by taking a look at factors beyond FICO score. These include such things as credit experience, employment history, educational background and more. The company looks at more than 1,000 variables for each loan applicant, which it claims delivers 4-8 times more accuracy than a traditional credit model, meaning it can approve more loans while lowering default rates for borrowers. 

Buy Now Pay Later (BNPL) is another industry that is skirting the traditional credit score and thriving. Even in the subprime market, companies like Katapult, a lease to own BNPL-like model, are seeing extraordinary results on repayment performance using alternative lending data. However, for many major purchases such as a home, a high-value car or boat, the FICO score remains king. 

According to Ayres, credit bureaus are certainly looking at what else can be added to the algorithm for credit score tabulation to provide the most accurate risk assessment for lenders, and the best rates and products for consumers and SMBs. 

There is indeed a scenario where everyone wins, but it’s going to take some work to get there.

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Patrick founded the firm based on his real-world world technology experiences with the understanding of what he wasn’t getting from analysts and consultants. Ten years later, Patrick is ranked #1 among technology industry analysts in terms of “power” (ARInsights)  in “press citations” (Apollo Research). Moorhead is a contributor at Forbes and frequently appears on CNBC. He is a broad-based analyst covering a wide variety of topics including the cloud, enterprise SaaS, collaboration, client computing, and semiconductors. He has 30 years of experience including 15 years of executive experience at high tech companies (NCR, AT&T, Compaq, now HP, and AMD) leading strategy, product management, product marketing, and corporate marketing, including three industry board appointments.