An amazing attribute of Gartner’s business model is the opportunity to speak with so many financial services leaders about their mission-critical priorities. From those interactions recently, we have detected that financial services leaders are now rethinking an activity that is fundamental to their success, and existence, as a business: how to assess the creditworthiness of a customer.
Several developments have prompted industry leaders to rethink how to evaluate credit risk:
- Advances in credit automation – new technologies now enable financial providers to assess credit risk more quickly and intelligently than ever before.
- The COVID-19 pandemic – the pandemic compromised traditional credit risk metrics such as income, balance sheets, and investable assets and rendered them unfit for purpose.
- The rise of financial vulnerability – as a result of both the pandemic and other factors, an increasing number of clients are financially vulnerable, struggling to meet basic financial needs. This is not a new problem, but the pandemic greatly exacerbated vulnerability across all client segments and demographics.
For these and other reasons, credit risk models are fundamentally changing. Providers are adopting more holistic criteria to assess clients beyond financial factors. They supplement these new models with AI and a more diverse set of decisionmakers to root out bias from credit decisions. And banks also seek to provide more transparency to help customers understand how credit decisions are made, and the steps available in the event of an adverse decision.
In conversations with our experts, financial services leaders tell us that they are exploring the following new criteria for credit risk assessment:
- Social Media Content – some banks now evaluate clients based on their social media profiles. By reviewing client profiles on platforms like Linkedin and Facebook, banks can assess client traits such as brand loyalty, reliability, conscientiousness, work ethic, and relationships with friends and family.
- Management Quality – when assessing business clients, some firms now evaluate the quality of the company’s management team. This approach played a key role during COVID-19 by enabling providers to assess a leadership team’s ability to navigate the crisis. For example, management teams that led their firms through the 2008 financial crisis gained experience that could potentially help their companies through the pandemic.
- Operational Data – banks can now look at a wide array of business operating indicators to understand credit risk. One bank Gartner works with reviews government records, utility data, regulatory filings, and satellite imagery data to more thoroughly understand business clients. The data often helps the firm lend to customers who lack typical documentation and might have been locked out of the banking system under normal risk models.
- Self-Assessed Customer Health – during the pandemic some firms deployed client surveys to understand how customers navigated the crisis. Consumers could offer perspective on the stability of their family finances, while business owners could give insight on what actions their firms took to adapt to COVID-19. Although these insights require vetting and verification, they can accelerate the prospecting of new customers.
- Investment Behavior – in the wealth management space, some firms are exploring the use of AI to assess clients’ past investment behavior as an indicator of future risk. For example, firms can look at how clients reacted to previous market swings, and which customers made big moves versus staying the course. For high-net-worth individuals seeking a credit relationship with their provider, investment behavior can help providers assess these opportunities.
Of course, legacy financial factors continue to occupy a prominent place in credit risk models and likely will for the foreseeable future. But these new indicators enable firms to assess clients more holistically and engage customers who historically might have been rejected.
For more information, take a look at our case studies of how banks reimagine credit risk criteria and the relationship between the business and risk management. Review our research on how automation is fundamentally transforming the credit journey. And learn more about how financial providers mobilize to support financially vulnerable clients. We encourage you to schedule an inquiry with our experts to discuss your approach and seek our support on this and other areas.
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