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Modernising Credit Assessment For Mortgages – Finding Real Insights To Create Real Opportunity

NEARLY 40% OF MILLENNIALS DON’T HAVE ENOUGH MONEY TO INVEST IN THEIR FUTURE - New survey finds that 39% of 25-34 year olds have no money left at the end of the month to invest in personal interests, savings or investment opportunities - A new survey conducted by The Resort Crowd shows that two in every five 25-34 year olds have no money left at the end of the month. The overseas property investment crowdfunding platform recently conducted the survey asking how 2,008 male and female millennials spend their last £50 as the month draws to a close. Just 2.5% of the respondents said they invest this money into investment schemes, whilst 14.44% put that £50 towards their personal savings. Alongside this, results also show that millennials are spending more on instant gratification than saving for their future, with over a quarter of the millennials forking out on health, beauty, lifestyle, clothing, travel and entertainment. The survey highlighted gender spending differences; with more millennial men (4.1%) donating to charity compared to women (1.6%), and women spending over 10% more on clothing and lifestyle (19.3%) than their male counterparts (8.9%). Kim Collier, operations director for The Resort Crowd, said: “It’s unsurprising that young people are finding it increasingly difficult to save, with figures showing average student debt now sitting at £44k. However, in these times of economic difficulty and rising cost of living, it’s more important than ever that millennials be putting money towards investment schemes which will help pay dividends in their future.” A higher percentage of 25-34 year olds are donating their spare money to charitable causes rather than investment opportunities that would potentially benefit their own future, with 2.8% donating to charity and 2.5% putting the money towards investment opportunities. GethinNadin, director of global partnerships at Benefex, said: “Millennials’ social conscience is typically strong; this affects who they work for, and in which sectors. However, the financial state of the nation is not helping people to get out of debt and into savings and investments. The average debt of Generation Z is over £3,000. 48% of young people aged 18-25 have debts outside of student loans and mortgages, and 47% of millennials spend half of their monthly pay on debt.” Michelle Pearce, chief investment officer at Wealthify, added: “The fact that more millennials don’t embrace investing is a huge missed opportunity and a crying shame, since as a group, they have a distinct and unassailable advantage over their older counterparts, namely time. Even with modest incomes and limited disposable income, it should be possible to put something away each month and by starting investing little and often today, they could give themselves a huge financial advantage later in life.”

By Mahesh Raghavan, Senior Principle – Financial Services Digital Consulting, Infosys 

Modernising credit assessment for mortgages– Finding real insights to create opportunity

Between the dream of home ownership and reality, too often comes frustration. After customers find the house of their dreams, the reality of the mortgage process becomes evident. That process is rigorous and often painful. While the level of scrutiny is understandable – lenders must know borrowers can repay – the data banks turn to can be significantly flawed. These flaws are more glaring than one may realise, and significantly undercut home ownership and revenue opportunities.

Flaws in the system: A limited perspective

Credit agencies rely on backward-looking assessment methods developed decades ago that don’t truly represent creditworthiness. A credit score predicated on someone’s past behaviour gives some indication of the ability to repay loans, but it is an incomplete view.

Also, more than 1 in 5 consumers have a material data error in their files that makes them look riskier than they are.

If incorrect data is reported to credit agencies or an agency makes a mistake, the responsibility to correct it falls largely on the consumer. They must undergo a difficult process to get their record corrected, during which they may be wrongly flagged as credit unworthy. From both the bank and consumer’s perspective, credit agencies fail to do their primary job and the lending institution loses out on the profitability of a creditworthy customer they wrongly rejected.

Banks, on their part, have credit assessment and underwriting rules that do not take into account consumers’ reality and changing lifestyles. Banks have a lot of data about customers, yet they don’t know their customers!

A fitting example of the banks’ shortcoming is the case of Ben Bernanke. Bernanke served as Chairman of the Federal Reserve until 2014, after which he took a position with a leading think tank in Capitol Hill.

He applied for a home refinance only to be shockingly rejected – a downright absurd outcome considering Bernanke made $250,000 per speech and had recently signed a multimillion-dollar book deal. Did the banks know their customer or did their underwriting rules reflect the reality of Bernanke’s creditworthiness?

Credit agencies not only have data quality issues, but they have antiquated rules like the banks. For example, when a person switches their mobile phone provider, the new provider performs a credit check. The credit agencies record this as a hard credit check and, in response, reduce that individual’s FICO score. From a practical standpoint, a customer switching to a service provider that saves them $25 a month is better off from a disposable income and creditworthiness perspective, yet their credit score indicates the opposite.

Finally, the process of building a credit score is fundamentally flawed. A person must borrow to build a credit score, whether they need the money or not. Encouraging people to become debtors has the unintended consequence of incentivising the kind of poor financial behaviour that can lead to a debt-ridden society.

At the cutting edge

Currently, few lenders have taken steps to address these problems, but there are solutions for those who look towards the future.

Certain lenders in the mortgage and student loan space have embraced a more well-rounded methodology. Rather than relying solely on the backward-looking FICO score from credit agencies, they take into account a borrower’s future potential. They consider the person’s educational background, including what and where they studied, their profession, their current employer and more, to form a holistic picture of that person’s financial health and their earning potential.

Another company that is proactively addressing the problem of creditworthiness uses lifestyle data, in addition to financial, professional and educational information, to predict a borrower’s ability to repay loans.

Other institutions use analytics to perform better credit assessments and to debunk long-held myths, such as the belief that if a subprime borrower owns a house and pays a mortgage, they are more stable than a subprime borrower who rents. Through empirical data analysis, lenders have shown that myth to be false. With new insights gained from analytics and machine learning, they can make more informed decisions when evaluating loan applicants.

Regaining social metrics – Putting community into community banking

Banking has existed far longer than credit agencies. How, then, did they gauge a borrower’s worthiness?

Back in the days when a bank served only its local community, lenders examined a borrower’s financial situation and also considered that person’s social reputation. For a long time, after towns grew and banks went national, we lost that social-reputation metric, but with innovative uses of new technology, lenders can regain a community-based approach.

Certain FinTech companies apply similar principles to their lending decisions through the use of non-traditional data to create social contracts. By developing a social footprint of the borrower based on their connections, social media,browsing history, geo-location and other smartphone data, they’re able to bring a social element into a borrower’s profile to create a more complete assessment.

Exploring innovative new solutions

One thing is clear: banks can do better. It is possible to significantly improve credit assessment and rid the old system of its flaws. The solution calls for an experimentation-and-fail-fastapproach. At the cutting edge, one Infosys client has set up an initiative using non-traditional data in its credit assessment to analyse each data point’s impact in predicting creditworthiness.

Incredible progress is being made in this space, but when it comes to change, most banks remain bogged down by inertia. Banks can break this by adopting design thinking and lean on start-up led approaches to experiment quickly, fail fast and learn faster, as they explore how to improve their credit assessment.

It is never easy to change. However, new technologies present possibilities for any lender to do things better. To overcome the inertia of how things have been done and look to how they should be done – for the customer, and for the business.

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