What waterfall of data and Bureaux should fintechs use?

Using the right credit bureau has never been more important.

Aside from the usual need for the best priced credit data – to keep profit margins lean and ensure credit providers can compete – the best quality data has always been important. However, this has been somewhat overlooked because an assumed trust has always been in place.

But right now, quality is under the microscope.

Why? Because all credit providers trusted the data from the top bureaux.

And now this is being thrown into question…

Following the FCA findings in November 2022 (you can recap on this here), the shock revelation of even the top 3 bureaux having major differences in data – directly impacting scoring – is understandably a major concern for fintechs.

This impacts accurate affordability assessments and fair lending – and to those that are wrongly accepted it creates major debt risks for both the consumer and the lender.

So, what do fintechs do now? How do they manage risk whilst the FCA reviews the credit information market, and how are things likely to change post-review?

We’ll cover this below 👇

A quick recap on the FCA findings

The November 2022 interim report highlighted several key issues impacting both consumers, and fintechs:

• Data pricing discrepancies: Larger lenders are able to exercise some bargaining power given their volume of business, volume of data they contribute, and through using multiple CRAs (to strengthen the perception of switching to another CRA).

• Data quality issues: There are significant differences in the credit information held on individuals across the 3 large CRAs. Market failures and inherent difficulties in matching new credit information can lead to poor outcomes, through:

  • the over‑supply of credit to individuals whose credit risk is over-rated and

  • limiting access to credit for individuals whose credit risk is under-rated or not understood

• Bureau monopoly: The market is concentrated and barriers to entry are high. Switching between CRAs can be difficult and challenger CRAs tell us they need access to historic credit performance data in order to compete effectively.

Ultimately, the recommendations that are going to start in February this year aim to provide a framework that ensures credit information is accurate, accessible and competitively priced.

📕 Keen to learn more? Take a look at our blog:  PurplePatch weighs-in on FCA credit information interim report

What should fintechs do right now? 

Should fintechs go multi-bureau? How should fintechs optimise their waterfall?

Ultimately, all lenders need coverage, accuracy of the scorecards, by comparing the CRA's AND they’ll need to be focused on how to get the best pricing.

But, this can be a little tricky to achieve for a number of reasons, such as…

• Each lender has its own customer segment and appetite for risk and may accept higher risk consumers over another lender 

• One CRA over another will be more tuned to a particular segment of the market  in terms of data availability and scores which will result in providing improved levels of balancing risk and opportunity  

So, what can fintechs do?

Using a secondary CRA will fill any gaps the primary CRA may have, which will improve accept rates and highlight potential negative data to avoid risk – adding another layer of default and affordability data will be hugely beneficial.

Fintechs should consider conducting retros with each of the CRA's to determine the gaps and scoring differences. A retro will highlight those customers a fintech should and should not have on-boarded which will show potential losses that could have been avoided and missed revenue opportunities that should have been taken on.

The results of the retros can inform the fintech what the waterfall of CRA's ought to be and what order of datasets should be searched to optimise on-boarding and minimise risk.

That said, we appreciate retros do take time and almost always cost money.

How fintechs can easily move from single to multi-bureau without increasing costs 

A multi-bureau approach can ensure fintechs are able to utilise additional sources of data and scoring methods available to make better informed decisions.

It’s actually one of the suggestions put forward by the FCA to mitigate gaps in credit information and to double-down on quality assurance.

However, the FCA found that most lenders (91%) use only one CRA for each application. 

Yet, fintechs are hesitant.

The main reason? We believe it's because lenders think it will be both costly and difficult.

But, this isn’t the case.

The good news is: There are tailor-made multi-bureau packages available. You’ll find that some of the bureaux provide packages that are actually designed for lenders who require a multi-bureau approach. The difference in these packages includes flexible usage between contract years, lower minimum commitments, and graduated pricing dependent on volume. 

And, contrary to belief, it doesn’t mean you pay more. A multi-bureau approach actually enables you to achieve best in market pricing. For instance, when a bureau knows a customer has the ability to easily use a secondary provider, they tend to price more keenly. And over time, the competitive element to become primary drives the price down. 

So, fintechs can access a wider variety of better quality credit information and bureaux are encouraged to offer searches at a lower cost. 

📕 Read more:  Multi-bureau: The future of credit information?

Not sure where to start? 🤔 Data benchmarking can help here as it allows credit providers to take back control by seeing exactly what options they have to improve data quality and pricing. Let’s delve into this a little more 👇

Your next step: Data benchmarking

Whether your contract is up for renewal or not, it’s advisable that you check-in on the quality of data you’re receiving from the bureau right now, and to check if your pricing is fair.

The way to do this? With data benchmarking ✨

There are benchmarks on multi-bureau pricing which allow for flexible usage between the contract years allowing for peaks and troughs of usage. Plus, they offer stepped in year pricing which rewards the customer for high usage – but, it also doesn’t penalise low usage and lower minimum annual spend.

So, a customer can benchmark for multi-bureau pricing and compare what their bureaux are offering to what they have offered others in their sector for the same footprint of spend. They can then use the benchmark to demand the same discounts the bureaux are offering other customers.

Mid-contract? If you are more than half way through the term, you can try to renegotiate with the promise of an extended term – using benchmarking to optimise pricing.

Ready to renew? If you’re about to renew, look for contracts with flexible terms from the get-go. What we mean by this is lower minimums, carry forward and better rates for increased volumes during contract. Data benchmarking can help with this too.