Using deposit analytics rather than credit scores makes a difference for consumers

Sometimes consumers don’t have enough money to pay for life’s challenges – or enjoyments. There is a growing effort among financial institutions to find ways to support their customers and members in a time of monetary shortfall. Regulators are encouraging this initiative.

Each year, millions of people borrow small amounts of money (often $500, $750 or $1,000) from nonbank lenders (such as payday lenders) to pay for unexpected expenses or simply manage household bills. Unfortunately, nonbank lenders can be expensive and inflexible.

But now, banks and credit unions have the ability to provide affordable small credit options (with the approval of regulators), enabling borrowers to save hundreds of dollars each – adding up to billions of dollars annually, according to a May 2023 Pew article, “Banks Are Transforming the Small-Loan Market – And That’s Good for Consumers.”

But how do consumer qualify for these small loans, especially if they have lower credit scores which are traditionally used as a basis for loan approval? Many consumers, particularly younger generations, don’t believe their credit score tells the complete story of their likelihood to repay a debt. 

Deposit-based analytics

Fortunately, with the advanced deposit analytics available today, short-term loan approval can be based on predictive analysis of consumer behavior (depositor account history) within the banking relationship, allowing even those with lower credit scores to qualify.

Deposit analytics looks at questions like these:

• Have they ever been overdrawn?
• Did they cure the overdraft promptly?
• How long have they had a relationship with the institution? 

These and other data points are highly predictive when it comes to positive outcomes for both sides of the equation.

The Pew article recommends that most banks and credit unions use an automated solution for small-dollar lending due to the quick turnaround required by borrowers. For example, Deposit Line from Fiserv is an end-to-end small-dollar lending solution that manages the process from underwriting to administration.

Deposit Line uses a patented, risk-scoring methodology to predict a customer's probability of charge-off, as well as transactional information to calculate an accountholder's capacity to repay. This ensures that both risk and affordability factor into these deposit-based risk assessment decisions, similar to how other credit products are underwritten.

Managing overdraft fees

Another method of creating their own liquidity is the use of bank and credit union overdraft programs. Overdraft-related fees have come under close scrutiny in recent years, and most financial institutions have changed their overdraft programs accordingly. Modifications made by financial institutions range from increasing the amount by which an account can be overdrawn before an accountholder is charged a fee, to drastically reducing or completely eliminating nonsufficient funds and overdraft fees, or just eliminating the possibility of overdrawing their account – all in an effort to simplify and improve customer relationships.

For those institutions who continue to allow overdrafts, more can be done to ensure the accountholder is likely to repay the shortfall. Rather than fixed overdraft limits, algorithms can be applied to use credit and debit historical transaction behavior to predict the maximum limit best suited for each depositor.

SmarterPay™ from Fiserv, an overdraft limit-setting solution, uses the same risk-scoring methodology as Deposit Line in calculating optimal, dynamic overdraft limits for depositors. The new Fee Forgiveness module gives the institution the ability to refund overdraft fees should the depositor bring the account positive within a grace period. Again, responding to accountholder demand while rewarding the right behavior.

Access to funds when consumers need it

Providing greater access to short-term liquidity resources using historical account behavior rather than credit score can make a difference for consumers as well as financial institutions. Offering proactive, lower-risk lending solutions can promote better account management behavior, strengthen consumer financial health and deepen accountholder relationships.