Credit’s ‘invisible’ problem - Building an inclusive economy

The World Bank defines financial inclusion as having access to ‘useful and affordable financial products and services, delivered in a responsible and sustainable way’. As the soaring cost of living continues to challenge household budgets, it’s never been more important that everyone has access to fair and affordable credit. Yet millions of people around the world are virtually invisible to the financial system due to a lack of relevant financial data on their credit files.

Not being recognised by mainstream financial organisations can mean paying more for goods and services. With little or no information available to make an informed decision, lenders consider the applicant to be high risk and so can only offer them financial products at higher rates, if at all.

Furthermore, some people with limited or zero credit history may also have problems accessing crucial public services because many organisations use online identity verification checkers based on a credit file.

These ‘credit invisibles’ can include those on low incomes, young people without an established credit profile, recent immigrants and expats, or older people who have limited credit exposure.

“You might be invisible to the financial system for a variety of different reasons,” explains Experian’s Chief Financial Officer, Lloyd Pitchford. “And not being able to access fair and affordable credit can present massive problems for people’s everyday lives. Some can’t get to work without a car, can’t get electricity without having to pre-pay, or can’t get a mortgage to buy their first home.”

“People need the best priced options available to them. But there are a lot of people who end up buying a washing machine that cost $2000 rather than $200, because the cost of credit is so high for them. Access to the mainstream credit system will eliminate that barrier for people and help them access affordable finance.”

By using a combination of financial education – explaining to people how they can build a credit history – and bringing new, relevant financial data into the credit ecosystem, the number of those people on the margins can be greatly reduced. For example, a valuable source of information is bank account transaction data. Powered by open banking - and the willingness of individuals to share their data - looking at bank account transactions can help to assess an individual’s income and affordability more accurately.

In the US, nearly 50 million consumers are thought to be ‘credit invisible’. In January, Experian launched Experian Go in the USA which allows credit invisibles to start building a credit profile within minutes and it has already helped 40,000 consumers build their credit score.

Experian Boost is another example of how the company is using technology and innovation to widen financial access. The service can be used to thicken credit reports, boosting credit scores and potentially tipping the balance between someone being refused or accepted for credit.

“Financial inclusion and the accurate assessment of affordability, so people can reasonably make repayments now and in the future, and access key public services, are issues we care passionately about at Experian,” adds Pitchford.

“It is our mission to reduce the credit invisible population and we believe introducing new and more appropriate data sources is the key. Our objective is to work with industry to unlock these, allowing mainstream lenders to better understand a new group of potential customers who, up until now, they have struggled to serve.”