The Reemergence of Thin File ConsumersSabrina Tharani |
As 2012 inches closer to the holiday season, the reemergence of one consumer segment may prove beneficial to merchants, banks and financial institutions: those with “thin and/or no credit file”.
“Thin file” consumers are those who do not have a sufficient enough payment history established to qualify for credit. They comprise 40 million people in America, typically young adults, elderly, and new immigrants, all of whom have had little or no recent interaction with the credit system.
Many “thin file” consumers are responsible spenders and savers, with no existing way to prove it. They have the potential to spend on big-ticket items, but haven’t found a lending product that works for them or have been denied access to credit due to circumstances they couldn’t have prevented (death in the family, high medical bills). Since the crisis, many in the payments business have shunned such prospects. However, not all of these consumers are high-risk, leaving millions with the potential to be loyal and profitable customers.
Instead of turning “thin file” away and forfeiting this prospective consumer base, banks, financial institutions and merchants can consider three tools to get this segment into the payment system: alternative measures of credit scores, new payment products and forming relationships early.
Current credit scoring models can exclude millions of trustworthy consumers who do not have a long enough credit history to qualify for loans. By revising these measurement inputs, banks can further refine who is credit-worthy and who is not. Analysts suggest pulling “alternate credit data” such as rental agreements, public records, payment history on reoccurring bills and tenure with a financial institution and combine it with core credit information to provide a more complete picture of credit worthiness, all while maintaining the rigor of current industry lending standards.
Another way to include “thin file” consumers is through revised payment techniques, such as the revitalization of layaway. Layaway, a popular budgeting mechanism much relied upon in the Great Depression, allows consumers to purchase mass durables (washing machines, furniture) or other consumer goods on installment. New online portals, such as eLayaway, bridge the online merchant and consumer, by allowing consumers to purchase relatively big ticket items with an agreed repayment schedule. When incremental payments cover the entire cost of the good/service, the item is shipped. These programs are available to those without credit, often at interest rates lower than the average credit card. They also alleviate the accumulation of additional debt and foster smarter spending.
Finally, banks and financial institutions should consider taking a page out of the merchants’ books and look to enable “thin file” consumers through adaptation of similar products, such as layaway. Forming relationships with these consumers early will not only encourage responsible credit habits, but also develop the foundation for a permanent relationship. Therefore, when these same consumers are in need of a larger loan, like a mortgage, they will likely return to the bank with which they already have a positive experience.