Craig Peterson - VP Sales
When most of us were gearing up last fall for turkey, football, and political arguments with Uncle David, Amazon announced they were going to start selling cars. And why not? They drop off boxes weekly at most of our doors for everything from TVs to toothpaste, but with an average order value of around $50 they’ve been missing out on one of the biggest ticket purchases most of us ever make: our cars.
The average American will spend about 1,000 times more on a car than that average Amazon order. Granted, that’s a lot less frequent than those UPS deliveries (unless you’re Jay Leno or Jerry Seinfeld) but there are multiple profit pools skitching after your bumper: the sale itself, the extra warranties, the service, and of course what we all love to talk about – the financing.
It’s not a stretch to believe Amazon has auto lending in its crosshairs as some are prognosticating. There’s good reason to expect they’re looking to take a bite out of this nearly $200 billion market, and who knows more about the 230 million Americans that Amazon counts among its customers than Amazon? After all, they know what we eat, what we watch, and even some of what our doctors know.
You do. That’s right – in the business of lending, no one knows more about what’s important for a credit union’s members than the credit union itself. Every member’s new (or used) car loan is yours to lose, and I’m here to not only tell you why but also how we can all win and keep Amazon on members’ front porches not in their garages.
The case for open banking data
Experian, Equifax, and TransUnion have had a good run. I should know, I spent much of my career working for one of them. For decades, they had the only data worth buying on whether applicants were more or less likely to repay loans. If you think about it, though, traditional credit reports and scores are like driving by looking in the rearview mirror.
I paid my mortgage, car loans, and credit cards all on time last month. And pretty much every month since Carter was in office. Does that mean I’ll pay on time next month if at all? Many of you know that I’m an upstanding law-abiding citizen, but if I lose my job or a tornado takes off my roof then my Mountain America Rewards Card might take a backseat to immediate responsibilities.
If any of those curveballs happen, the mainstream bureaus would be clueless for a couple months until I missed a payment and then that missed payment gets furnished to the bureaus. But if I’m getting paid every two weeks and that paycheck doesn’t show up in my share draft account, anyone who has permissioned access to my account via open banking will know of my deteriorating finances in real-time. And if I’m making regular loan payments but that changes, you guessed it – open banking data reveals that missed payment almost immediately.
On the flipside, legacy bureau data is silent on what’s arguably the more important side of my personal P&L and balance sheet: income and assets. With most Americans gainfully employed and a hot jobs market, the critical question before delinquencies ever get reported to the bureaus is who’s living within their means and who’s living paycheck to paycheck. That’s why everyone from the bureaus to the CFPB are talking about the potential for cashflow underwriting based on open banking data.
The hard part with open banking data is translating raw data into automated, actionable insights in the same way that the old school bureaus produce thousands of attributes from the tradeline data they’re furnished. Almost anyone can stare at a stack of share draft account statements for a sense of whether a member is saving and spending responsibly or living paycheck to paycheck. It’s harder to distill these behaviors into attributes, even harder to understand the implications of any number of attributes and risk models for a loan portfolio.
This all is why I joined EDGE. There are a dozen or more companies who create analytics on top of open banking data, but there’s only one whose analytics have been built through experience with a profitable, growing loan portfolio. In fact, EDGE’s attributes and risk scores have been battle-tested on millions of consumer credit applications and billions of bank transactions . And you’ll see the real value in something “built by lenders for lenders” if you try asking another open banking player which of their attributes are more performant and how to implement them in your decisioning.
Advantage: Credit unions
Let’s turn to Amazon and why the battle for consumer lending is yours to lose. Depending on who you ask, there are anywhere from three to five “Cs” of credit. Taking each in turn, let’s examine whether a credit union or Amazon has the advantage from your respective starting positions:
See that? I didn’t even have to ask my lawyer about using Amazon’s logo, but that’s because the odds are truly in credit unions’ favor. The relationships and resulting data you’ve already got on your members has all the insights you need to automate, approve more, and improve offers.
However, there are two important caveats to any proprietary data before it can be a competitive advantage: First, you actually need to utilize that data. Second, you need to do so in real-time. Much like humans supposedly only use about one-third of our brains, most credit unions only know what they know about members in the abstract – the open banking insights inherent in your own data are largely untapped and only accessed through extensive manual review.
The time is now to unlock the latent power in your own data and take the hill! Amazon and a plethora of fintechs aren’t content to chip away at new markets when the largest profit pool is Main Street, USA – and your members. The competition also probably has access to your data through the open banking ecosystem, so there’s a good chance that if you don’t connect the dots for better member care then someone else will.
It doesn’t stop with your data – or with your members
As I mentioned earlier, if you’re like most credit unions, half your members have direct deposit with you – which means the other half have their primary account elsewhere. Connecting to those accounts through open banking can be a seamless experience with the right data provider.
The beauty of open banking is, to state the obvious, its openness. With appropriate security checks and consumer permissions, you can see the balances and transactions from any financial account in the U.S. just like you’ve already got on your core for members’ share draft, savings, and investment accounts.
Not only can you fill in important gaps for less active members, you can also introduce open banking connectivity into every indirect application. So for members and non-members alike you’re able to see a complete financial picture and not limit your decisioning inputs to a legacy bureau score before manual review.
Actionable insights from open banking data about applicants’ income and credit risk can put you on equal or better footing versus other lenders – and ensure you’re not a lender of last resort when less active members can’t get credit from their primary banking relationship or online.
Bringing it home
To underscore the opportunity for you to do much, much more with your own data and incorporate a complete financial picture for all applicants into your underwriting, let’s look at a couple examples and consider both the happy and unhappy paths:
1) Jane Doe earns a good living and her stable paychecks are automatically deposited her share draft account with you, which she uses almost daily for debit card purchases and bill payments. She’s had several loans with you over the past decade, all eventually repaid after the occasional late payment. Her credit score in the mid-600s reflects this history as well as balances on a couple “off us” credit cards. Jane is now applying for a new loan that will ultimately meet your underwriting criteria for the C risk band.
2) Joe Public isn’t a member when he walks into a local dealers hip, agrees to terms on a car that’s new to him, and sits down with the finance manager who proposes applying for a loan with you because of competitive rates and dealer incentives. Joe is a self-employed tradesman with a healthy six figure income and a near-prime credit score that would eventually pass your underwriting without issue.
Join me on the happy path! Hereat EDGE, we’re making important strides to bring open banking insights to credit unions as the only platform building direct core integrations alongside established external account access for nearly every account in the U.S. With your data our platform and your data, it’s possible to outpace an impersonal, transactional behemoth like Amazon and bring every applicant along the happy path by quickly and seamlessly presenting the best possible offers based on better data and insights.