For many consumers, credit cards are a key component to maintaining financial stability. They can help cover unexpected expenses, provide a way to build a credit file, bridge a paycheck gap and more. Andrea Freeman, professor of law at University of Hawaii at Mānoa, sums up their use in a recent article: “Basically, credit cards are essential to modern life”.
While cards may seem to be everywhere, they are not necessarily a part of every consumer’s wallet. This is especially true when it comes to minority populations in the US. While the Report on the Economic Well-Being of US Households in 2018 showed that 81 percent of adults have at least one credit card, it also noted that card ownership rates were lower in minority groups. Black Americans reported 68% card ownership and Hispanic Americans reported 72% card ownership.
That same report also highlights disparities in the credit application process. Last year, more than a third of Americans applied for credit, but minority groups were much more likely to have been denied or approved for less than requested. The numbers are staggering: across all income tiers, 24% of white applicants were denied credit or approved for less than requested, compared to 55% for black applicants and 45% for Hispanic applicants.
Leveling the Playing Field
Some consumers, and particularly minority consumers, choose to opt out of the credit application process entirely if they have negative perceptions about the potential for denial. Others make the choice unconsciously because they lack the education and financial literacy to understand the implications of credit.
There are both legal and moral reasons to ensure that your credit issuance cuts across all societal groups. So how can you step up to the plate to create an application process that opens the doors to financial inclusion and taps into the large market of unbanked and underbanked people? We’ve looked at the issue before, but the answer is twofold.
Alternative Data
First, banks and other financial institutions can start to incorporate new and alternative data into their credit card decisioning logic. While traditional decisioning has often put emphasis on tiers of consumers based on one or two major attributes like a credit score, this approach has failed minority populations and those with thin or no file status at credit reporting agencies.
When companies begin to supplement their decisioning criteria with new and alternative data, they will inevitably see changes in who qualifies for credit. Details like rental records, utilities payments histories, phone bills, employment history and more can help a bank open the door to credit cards for individuals and groups that need them.
Improved Technology
Second, FIs can upgrade legacy decisioning systems to modern, enterprise decision engines that facilitate always-on, instant credit decisions. Rigid decisioning engines (Strata, ACAPS and others) do not work as well in the modern digital landscape, and can hamper a company’s ability to make updates to credit policies, attributes and risk factors.
Those rigid engines can also present challenges when it comes to incorporating new and alternative data, which is the lynchpin in offering credit to minority and underbanked groups. The connections required, as well as the technical implementation of a new credit attribute into a decisioning flow, can be too much for many legacy systems to manage.
I’m convinced that companies that fail to recognize that shortcoming – and take immediate steps to rectify it – will be the ones that see market share slip away as potential customers have their credit needs met elsewhere. And I’m not alone; major banks like JPMorgan Chase are taking a proactive approach to supporting minority business owners and consumers, as noted in American Banker.
A nimble, flexible, data-agnostic engine can help banks overcome those challenges and implement real-time updates, attribute additions and more.
Technology for Tomorrow
With an enterprise decisioning engine to support credit card origination, banks and other financial institutions can bolster their market presence today, prepare for the future, and help address the disparities in credit issuance.
Whether re-configuring decisioning logic, adding new and alternative data providers, supplementing fraud detection and prevention capabilities or adapting policies to accommodate changing regulations, companies using the best available technology will be able to manage the rapid changes in the industry.
Those same companies will be in the best possible position to turn the tide on credit card issuance and begin effectively providing cards to deserving customers from minority and underbanked groups – which is a win for everybody.
