Building Consumer Credit: A Winning Strategy for Financial Institutions and Consumers
Many financial institutions elect not to provide credit to consumers with damaged or insufficient credit history, believing the risk these consumers pose to the institution outweighs the potential benefits of serving them. This mindset is potentially detrimental to consumers, who may be inadvertently subjected to harm when they are forced to rely upon low-quality credit products, and to providers themselves, who miss out on real profit opportunities as well as the potential to develop loyal and long-term customer relationships.
Banks and credit unions can and should be doing much more to support consumer credit building – and, more importantly, they can do so in ways that align their own success with the success of their customers. With few large-scale consumer credit building solutions existing today, banks and credit unions have a critical role to play in bringing scale to the innovative solutions that do exist but that are not yet widely available to consumers. In this paper, we suggest a number of initiatives that banks and credit unions can undertake to help build the credit profiles of low and moderate income consumers. We offer initiatives that can be implemented in the short-term, medium-term, and longer-term, with the short-term solutions being the least labor and cost-intensive, and the longer-term solutions requiring a more significant effort on the part of individual financial institutions as well as more systemic, industry-wide change.
Strategies for Banks and Credit Unions to Support Credit Building:
Short-term – Credit Building Tools, Services and Partnerships:
- Connect customers to online and mobile-enabled credit score tracking tools
- Connect customers to personal financial management (PFM) tools, or build in-house PFM tools
- Partner with non-profits to offer high-touch products and services
- Connect customers to online and offline debt management programs
Medium-term – Risk-Limited, Credit Building Products:
- Develop and market secured credit products or credit builder loans
- Develop and market low credit lines
- Offer loan terms that improve with good behavior
- Invest in marketing efforts for credit building products
Longer-term – Go Beyond Traditional Credit Files:
- Consider New and Deeper Sources of Data for Credit Decisioning
Consumers approach banks and credit unions in search of an appropriate small-dollar credit product every day, and in some cases, these consumers do not qualify for the product they are seeking. However, consumers should never have to leave a financial institution completely empty-handed and without any knowledge of how to improve their credit standing. No matter the level of time and resources banks and credit unions are able to devote to customer credit building initiatives, there are a number of ways for financial institutions to help customers. Those institutions that do so will derive significant long-term benefits in customer loyalty and retention, and also uncover new potential revenue sources.
Click below to read the full research paper.
