In my role as a strategy and go-to-market leader for a fintech brand, one question is always at the top of my mind: how can we give customers a better and easier financing experience? Very often the answer lies in the data. It truly is all about the numbers. 

Here’s how lenders can tap into the wealth of data now available through the cloud and open integrations to deliver the customer experience their clients deserve on every loan application. 

Data and Credit: How to Grow Lending in 2024 

Lending has long been the foundation of the banking industries. However, the way that loan applications are evaluated and underwritten by traditional lenders has failed to strengthen this foundation.  Traditionally, banks have relied heavily on historical data and manual underwriting processes to assess creditworthiness and credit risk rating. 

But such methods often fall short in providing timely and accurate insights into a borrower's financial health. And in a fast-moving economy, this approach to underwriting often carries hidden risks. This is especially true when the client is a small business where reliable information is hard to come by and business conditions are changing almost every week. 

In an era where information moves at the speed of light, banks must commit to using the best information available to make loan decisions. It may now be the best way for them to grow. 

The Challenge of Stale Data in Traditional Lending 

In the traditional lending system, banks frequently grapple with the challenge of building a credit history on a business borrower. Very often the best traditional underwriting strategies depend on information from years in the past, such as old tax returns or financial statements.  

It's not uncommon for banks to keep their customers waiting for weeks or months in a bid to gather and analyze this historical data thoroughly. Certainly this can be warranted, especially for larger loans. But there’s a hidden risk that too many lenders are missing when they allow this process to become the rule for all loans: poor customer experience. 

The drawback becomes particularly evident when there are large shifts in the economy. Think back to the early months of the COVID-19 pandemic. How would a 2018 tax return help you figure out if a business was going to go bust or gangbusters in response to a novel pandemic in 2020? 

Or take a look at a story that has unfolded recently, with the cyber breach of Change Healthcare. Perfectly healthy businesses are suddenly stuck without cash flow through no fault of their own.  

In situations like these, as well as in many day-to-day credit transactions, traditional underwriting techniques fail to take account of information that could be used to better qualify a client.  

Why Should Banks Be Concerned About Stale Data? 

If lenders want to grow in the future, they must be concerned about the limitations of traditional lending methods.  

Firstly, the delayed decision-making process hampers the ability to seize time-sensitive opportunities. In dynamic markets, businesses often require quick access to capital to respond to emerging trends or challenges. Many of a lender’s best customers are those who received an extension of credit that helped them capitalize on a market opportunity. To find growth, lenders must be able to find the opportunities like these and fund them. 

Secondly, the gap between the time an underwriting decision is made and the current economic conditions facing a business can lead to poor credit performance. A business that may be a good credit risk based on two years of filed tax returns might not be a good risk going forward, or may not be able to sustain the proposed debt service based on forward-looking trends.  

Lenders that fail to price risk accurately will inherently limit their own growth potential.  

The result can be both missed opportunities for the bank and, on the other side of the equation, could also mean a denial of financing to deserving businesses. 

The Promise of Alternative Data Sources 

Unlike the conventional model where banks heavily relied on historical data and lengthy manual underwriting, the use of alternative data can reshape the way financial institutions approach lending decisions. 

Alternative data offer a powerful solution to the challenges of traditional lending methods.  

For example, U.S. lenders using Biz2X can improve lending decisions and reduce portfolio risk by using near real-time data-driven insights from Mastercard’s Small Business Credit Analytics solution on consenting small businesses. The data obtained from Mastercard seamlessly integrates with the existing information a bank has about a client, allowing banks to analyze trends that would never be visible with traditional financial statements. Data like this includes sales trends, giving the lender a timely picture of the business's economic prospects. 

Biz2X Portfolio DNA also enables the lender to monitor their outstanding loan book, helping the lender respond to negative portfolio or loan-level trends faster. Both cash flow and credit card transactional data are available for analysis, with trends and insights generated digitally for a credit officer to audit when they need to.  

This information equips lenders to both make better-informed lending decisions, and to identify risks in their portfolios early on so they can proactively support their borrowers in advance of a possible default.  

The Benefits to Clients from Data-Driven Underwriting 

Better credit data empowers lenders to grow sustainably because it also empowers their clients.  

Alternative data tools like Portfolio DNA are particularly beneficial for companies in traditionally underserved communities and for those lacking an established financial track record. These companies are used to a rigid banking system that often either keeps them outside of the financial lending system or delays their financing due to endless rounds of review. Alternative data sources offer the opportunity for promising small businesses to prove that they are stable enough for additional capital or a new credit line. This speeds up the approval process and offers the opportunity for banks to delight clients, which will lead to these clients increasing their banking services with that same bank. 

Data Strategy: The New Growth Channel for Banks 

Adopting alternative data for credit decisions is the undervalued growth strategy for banks and lenders to pursue.  

The key lies in balancing traditional underwriting discipline with modern, data-driven approaches, creating a dynamic and efficient lending process that benefits both financial institutions and their clients. 

If lenders want to grow in this dynamic economy, better data had better be part of the plan.