The API Unlocking Financial Inclusion in Credit and Lending

A credit score is more than just a number — it’s a gateway to financial stability and access. However, traditional credit reporting mechanisms often fall short, inadvertently excluding significant portions of the population (in the ballpark of 100 million people). The culprits? Inaccuracies in credit data reporting, errors in credit files, and the challenges associated with building a credit history from scratch.

And having to build credit from scratch happens more often than you would think. Consider a scenario where a young entrepreneur trying to launch a business finds herself ineligible for a loan due to her thin credit file. Similarly, an employee given a foreign assignment may face hurdles in securing a mortgage because his credit activities back home aren’t recognized by domestic bureaus. These situations underscore a systemic issue — financial exclusion due to inadequate and incomplete credit reporting.

Financial Exclusion is the Status Quo

According to research by Experian and Oliver Wyman, 19% of American adults (49 million consumers) lack conventional credit scores. Of that segment, more than half (28 million) are “credit invisible,” meaning they have no mainstream credit file, likely due to a lack of previous credit history. Another 21 million are unscorable, meaning they have thin credit files — less than what is needed for a conventional credit score. Outside of those without conventional credit scores, another 57 million are categorized as subprime, preventing them from accessing mainstream credit products at mainstream rates.

In short, a lack of credit history, a thin credit history, or a poor credit history are major problems. This is compounded by the fact that modern credit reporting is predominantly controlled by a few major bureaus whose data collection processes are confusing for many, which can result in errors that hurt consumers. Common issues such as misreported payments, outdated information, and the non-inclusion of smaller yet relevant credit activities can negatively impact a consumer’s credit profile. This is particularly disadvantageous for young people, immigrants, and those in lower-income brackets who may not have extensive credit histories or access to traditional credit-building products like credit cards or loans.

Together, these issues have significantly diminished access to credit, especially for historically disadvantaged groups. These issues have also deemed these groups “untouchable” to lenders, even though these consumers could potentially convert into customers without adding any undue risks — if the right credit data was in play.

The answer is to use new and different data sources that are now accessible for credit decisioning — things like utility and rent payments, data from checking and savings accounts, insurance payments, and more. These expanded data sources shed a more accurate light on payment capacity and provide information that could inform new attributes and credit scoring models. Experian and Oliver Wyman posit that using these data sources could allow lenders to score nearly all 21 million conventionally unscorable consumers — and perhaps even the bulk of the 28 million credit “invisible.”

Enacting this solution is more critical than ever because financial exclusion is more serious than a simple inability to secure loans. It affects a person’s capacity to rent homes, own credit cards, and, sometimes, secure employment. The macroeconomic friction this causes ultimately harms everyone as lenders lack the data to appropriately price risk and adjust interest rates using blunt methods instead of surgical precision.

Driving Disruption With Accurate Data Furnishment and Consumer-Permissioned Data

As a result of the financial exclusion perpetuated by dated credit models, many consumers — particularly those lacking traditional credit histories — are increasingly turning to novel fintech solutions. These fintechs are adept at navigating lending risks through innovative technologies that make it fast and easy for consumers to build or access credit.

It’s a step in the right direction, but more needs to be done. Incumbent lenders are not equipped to furnish this type of alternative credit data. In fact, the means they rely on to furnish traditional credit data are outdated and broken, often resulting in errors and inaccuracies.

Addressing the failings of traditional credit modeling and furnishing are two ways that fintechs and traditional lenders can make a difference; however, consumers are positioned to take it a step further. They hold the key (permission) to a wealth of data regarding their payment activities. If they elected to share that information with credit bureaus, thin credit files could seamlessly improve over time. This consumer-permissioned data will play a critical part in modernizing credit modeling and enriching credit files where it’s needed most.

In other words, the credit industry is ripe for disruption — and there’s an opportunity for traditional lenders and fintechs alike to make a giant leap in financial inclusion. It requires two major shifts: enhancing the accuracy of credit data furnishment and embracing consumer-permissioned data. Together, these enhancements can help more than 100 million consumers — and the lenders that serve them.

It’s what we’re focused on at Bloom, and we’re tackling the issue on all fronts:

Enhancing Fintech Capabilities

Fintechs are well-versed in helping consumers who traditional financial institutions often overlook due to the perceived higher risk they represent. With their agile structures and innovative approaches, fintechs embrace this challenge. But for fintechs with an investment thesis centered around novel ways to originate loans, furnishment might be an afterthought. For others who felt like they could be disruptive in all areas of the business, it’s the realization that they’ve bitten off more than they can chew.

Investing in a plug-and-play furnishment solution allows fintechs to enhance their capabilities while continuing to grow their core capabilities. Their modern approach to credit enables them to furnish fresh, accurate, and alternative credit data to bureaus to better serve their customers and the ecosystem as a whole.

Reprioritizing the Impact of Clean Credit Data

The current landscape of credit reporting is fraught with inefficiencies, primarily due to the outdated technologies employed by incumbent providers. These traditional systems often generate errors at rates that are simply unacceptable, partly because these systems do not receive the necessary updates to keep pace with changing guidelines. The Consumer Data Industry Association (CDIA) updates its reporting guidelines annually, yet many traditional furnishment solutions fail to adapt, leading to inaccuracies that can severely impact consumer credit scores.

Whether it’s a lack of investment in technology or the perspective that furnishment is not a business process but just a stick to prevent losses, accurate, error-free furnishment must be prioritized. An API-based furnishment solution offers a modern alternative that emphasizes accuracy and compliance. By adopting such technologies, incumbents can avoid the pitfalls of traditional systems and ensure that their reporting mechanisms are as error-free as possible. This not only enhances consumer trust but also positions lenders and solution providers as reliable and responsible players.

Expanding Credit Opportunities With Consumer-Permissioned Data

This is a transformative approach that puts credit control back into the hands of consumers and improves the accuracy of reporting for the entire ecosystem. Our technology enables consumers to opt-in to report demand deposit account (DDA) information to bureaus, helping those without conventional credit scores — or who have poor credit scores — enrich their credit profile over time with data that accurately reflects their ability to pay.

By allowing individuals to share their financial data, such as rent and utility payments, with credit bureaus and potential lenders, they can demonstrate financial responsibility where traditional metrics may fall short. This level of transparency enhances consumers’ credit profiles and their ability to access financial services. We make it easy for financial institutions to participate compliantly by handling customer opt-in to consumer-permissioned data with low- and no-code options. We act as the translation layer so FIs can better serve their customers while expanding their customer base for credit products and services.

Bloom’s furnishment API and consumer-permissioned data solution eliminate errors and inaccuracies in traditional reporting and unlock a world of possibilities for consumers, lenders, and fintechs alike. What’s more, these solutions enable FIs, bureaus, and furnishers to participate in creating a more fair and equitable credit ecosystem for consumers, all while gaining the ability to offer more credit opportunities to more people.

Unified Credit Scoring for a Fairer Future

The journey toward financial inclusion requires the demolition of outdated barriers and the adoption of more inclusive practices in credit reporting. By pioneering accurate data furnishment and championing consumer-permissioned data, we are not just participating in the industry’s evolution — we are leading it. Through these efforts, we envision a world where credit is not just a tool for the few but a bridge to financial empowerment for the many.