JPMorgan and others plan to issue credit cards to people with no credit score
Some of the largest U.S. banks are planning to start sharing data on customers’ deposit accounts as part of a government-backed initiative to extend credit to people who traditionally don’t have the ability to borrow.
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& Co., Wells Fargo WFC 1.31%
& Co., US Bancorp USB 0.90%
and others will take into account information from applicants’ checking or savings accounts at other financial institutions to increase their chances of being approved for credit cards, according to people familiar with the matter. The pilot program is expected to be launched this year.
It is for people who do not have a credit rating but are financially responsible. Banks would look at applicants’ account balances over time and their overdraft history, the people said.
The effort, if successful, would mark a significant shift in the underwriting tactics of the big banks, which for decades have enshrined credit scores and credit reports as the primary tools in determining who gets a loan. They usually reflect a person’s borrowing history in the United States, including whether they are paying back their loans on time. Those who pay only in cash or by debit card, or who are new to the United States, often do not have a credit score.
In the United States, some 53 million adults do not have a traditional credit score, according to Fair Isaac Corp.
, the creator of FICO credit scores. Many are often limited to payday loans and other expensive forms of credit.
Black and Hispanic adults in the United States are more likely than white or Asian adults to not have a credit score, according to a 2015 report from the Consumer Financial Protection Bureau.
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For years, banks have cobbled together ways to approve borrowers with little or no credit history, though efforts have tended to be small-scale and company-specific. FICO announced in 2018 a rating system that takes into account how consumers manage their bank accounts. Few lenders – and no bank – have subscribed to it, according to people familiar with the matter.
JPMorgan, Bank of America Corp.
and other major banks in recent years have developed risk models based on their own clients’ bank account activity to approve funding for applicants with little or no credit history, some people said. This has resulted in the approval of credit cards for about 700,000 additional customers at JPMorgan since 2016, some of those people said.
The new pilot program is designed to be larger and better organized. A dozen banks have agreed to exchange data, according to one of the people familiar with the matter, an unusual level of collaboration. JPMorgan, for example, can approve a credit card application from someone who has a deposit account with Wells Fargo but does not have a credit score.
The plans grew out of the REACh project, or Round Table for Economic Access and Change, an effort launched last summer by the Office of the Comptroller of the Currency. After the protests following the murder of George Floyd in police custody, the OCC summoned bankers, financial technology executives and leaders of nonprofits to think about how to increase the access to credit for historically disadvantaged communities.
The agency at the time was run by Brian Brooks, a choice of Trump. Michael Hsu, who is now the Acting Controller, said he was delighted to be a part of the REACh project.
“Its mission – to remove barriers for minorities and underserved people to participate fully and equitably in the country’s economy – is of critical importance, especially now,” Hsu said in an emailed statement. .
JPMorgan should be the first to use deposit account data to assess credit card applicants. As of this fall, the bank plans to start approving applications based on contributions from other banks.
“This is not a Hail Mary,” said Marianne Lake, general manager of consumer loans at JPMorgan. “It’s something that we know works. ”
Banks discuss use of major credit reporting firms — Equifax Inc.,
Experian PLC and TransUnion – as well as Early Warning Services LLC as conduits for this data sharing, the people said. Early Warning Services is a bank-owned organization that oversees the Zelle money transfer network.
Bank account data will be reviewed after banks attempt to check applicants’ credit scores and find that they do not have any, according to people familiar with the matter. Not having returned checks, for example, could improve a person’s chances of being approved.
Banks are also considering possibly working with other data providers and aggregators, such as Plaid. Inc.
and Finicity, to account for an applicant’s track record of paying rent and utility bills, some people said, adding that the banks decided to start with deposit account data because it is more widespread and more readily available.
Pilot banks could eventually drop out. They could also be exposed to loan losses if this new method overstates the creditworthiness of borrowers.
Banks might also face concerns about data privacy and transparency. As part of the pilot project, the fine print of a credit card application, which typically allows a bank to access a person’s credit history, will also cover the search for bank account data, some relatives said. folder.
For banks, the planned changes respond to an issue of social importance and offer them a new business opportunity. Consumers approved under these new methods that demonstrate good borrowing behavior could potentially be eligible for auto loans, mortgages and other products.
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