The Impact of Consumer-Permissioned Data on Financial Product Design
We’ve written extensively about how consumer-permissioned data can be used to fine-tune the accuracy of credit scoring and broaden financial inclusivity. With participation from the credit and lending ecosystem, it stands to do both, but its capabilities go further. Consumer-permissioned data could revolutionize the design and customization of financial products, too.
When consumers can grant access to their financial data, lenders see a more comprehensive view of their financial behavior. Subsequently, it has transformative power to influence product design and the overall financial ecosystem.
The Reality of Financial Fragmentation and Lender Blind Spots
We live in a digital-first financial world where consumers often manage accounts with multiple institutions. This fragmentation means that no single bank or credit union has a complete view of a consumer’s financial activities. For example, a consumer might have a savings account with one bank, a checking account with another, and a credit card with yet another institution. Each bank only sees the transactions within the walls of its institution, missing out on the broader context of the consumer’s financial behavior.
Without consumer-permissioned data or alternative data sources, lenders often make decisions with limited visibility. Traditional credit data furnishment and modeling systems primarily rely on credit scores, historical credit utilization, and repayment history. These methods, while useful, paint an incomplete picture of a consumer’s financial health. Consequently, lenders might miss out on critical insights that could influence their lending decisions.
The current credit data furnishment system contributes to this issue by focusing heavily on past credit behaviors. This approach can overlook significant factors such as current income, cash flow, and other real-time financial activities. For instance, a consumer with a steady income and responsible financial habits may still be deemed risky if they lack a robust credit history. This blind spot often leads to higher interest rates or exclusion from the credit market altogether despite the consumer’s true creditworthiness.
Consumer-permissioned data bridges this gap by allowing consumers to consolidate their financial information from various sources and share it with their lenders. This comprehensive view enables banks to design products that better match the consumer’s financial profile and needs. It also facilitates more accurate credit assessments, leading to fairer lending practices and improved financial inclusion.
Furthermore, the power of consumer-permissioned data goes beyond more accurate credit assessments. A more holistic view of consumer behaviors also enables financial institutions to optimize and tailor financial products and offerings.
Consumer-Permissioned Data and the Future of Financial Product Design
Consumer-permissioned data allows individuals to share their financial information across banking partners, enabling lenders to make more informed and tailored decisions. By providing access to a broader range of financial data, consumers can receive products and services that better align with their needs and behaviors. Moreover, banks gain powerful insights that can inform more personalized product offerings and enhance overall stickiness.
Tailored Financial Products and Services
Consider a consumer who regularly pays for streaming services through their banking provider. By analyzing this data, the bank can identify an opportunity to create a specialized rewards card that offers discounts on streaming services. This targeted approach benefits both the consumer, who receives a product tailored to their lifestyle, and the bank, which enhances customer satisfaction and loyalty.
Similarly, imagine a new college graduate who banks with multiple institutions and obtains their first credit card at an APR of 27.99% due to their limited credit history. Traditional credit evaluation methods might not capture their full financial potential. However, if this graduate permits lenders to access their comprehensive financial data, including their checking account activities and on-time bill payments, lenders can gain a clearer understanding of their financial responsibility. This insight can lead to lower APRs and offers for additional financial products, such as personal loans or auto financing, more quickly and accurately.
Pulling Back the Curtain: The Lender’s Perspective
From a lender’s perspective, consumer-permissioned data is a powerful tool for refining credit decisions and informing future product offerings. Banks typically conduct quarterly reviews of their customers to assess their financial health and determine eligibility for lower APRs or other financial products. However, these reviews are often based solely on the data within the bank’s walls, leading to incomplete assessments.
Incorporating consumer-permissioned data allows lenders to perform more holistic evaluations. They can track a consumer’s financial behaviors across multiple accounts, providing a comprehensive view of their spending habits, income patterns, and overall financial stability. This deeper insight allows lenders to make more precise credit decisions, offer more competitive rates, and recommend products that genuinely meet the consumer’s needs.
The Benefits of a Tailored Approach
The adoption of consumer-permissioned data could usher in a new era of financial product design. These comprehensive data insights would allow financial institutions to innovate and create products that resonate more deeply with consumers. This approach enhances the customer experience and drives business growth through increased customer loyalty and engagement. In short, a standardized approach would benefit the entire industry.
Financial Inclusivity
One of the most significant benefits of consumer-controlled data is its potential to promote financial inclusivity. Traditional credit scoring models often exclude individuals with thin credit files or those who have had financial difficulties in the past. Lenders that incorporate alternative data sources can better assess the creditworthiness of these consumers, providing them with access to credit and financial products that were previously out of reach — and that are uniquely tailored to each individual’s needs.
Retained Sovereignty Over Customer Data
For banks competing with fintech companies, retaining sovereignty over customer data is crucial. Consumer-permissioned data allows banks to offer the same level of personalized service that fintech companies provide without relinquishing control over their customer relationships. Maintaining this control enables banks to safeguard their market position and continue to innovate within a competitive landscape.
Enhanced Outcomes for Credit Bureaus
Credit bureaus also stand to benefit from the integration of consumer-permissioned data. Incorporating consumer-permissioned yields a wider array of data points, allowing bureaus to refine their credit models and offer more accurate assessments of consumer creditworthiness. This improvement can lead to better risk management for lenders and fairer credit evaluations for consumers.
Consumer-Permissioned Data: The New Credit Frontier
The impact of consumer-controlled data on financial product design is profound. Granting consumers the power to share their financial data enables lenders to gain a more comprehensive understanding of their financial behaviors and needs. This holistic view enables the creation of tailored financial products, more accurate credit assessments, and enhanced customer experiences.
As the financial industry continues to evolve, the integration of consumer-permissioned data will become increasingly essential. Financial institutions that embrace this approach can drive innovation, promote financial inclusivity, and ensure they remain competitive in a rapidly changing market. The future of financial product design lies in harnessing the power of consumer-controlled data to create a more inclusive, responsive, and dynamic financial ecosystem.
