Nontraditional data for determining creditworthiness just became traditional.
News last week that Ford Motor Credit will go beyond what has been standard in evaluating consumers' creditworthiness means that the industry will have to re-evaluate what is considered standard. When a player such as Ford Credit -- with scale and, let's face it, a history of being a tad conservative in its business decisions -- makes a change like this, everyone else has to take notice.
Automotive News has reported for years that alternative data are available to lenders that want another way to look at consumers with thin credit files. The providers of such data have long argued that, say, a millennial with no mortgage still has a history of paying, or missing on, her smartphone bills.
But Ford Credit's embrace of an alternative approach goes beyond conceding that alternative data are available. According to Ford Credit, that alternative approach is actually better than what the captive finance company has been doing until now.
As reported by our Hannah Lutz:
Ford Credit and ZestFinance, a credit-decisioning technology platform, conducted a study this year in which each took the same sample of Ford Credit accounts from several years ago. ZestFinance used its methodologies and machine learnings to create risk models and place each customer on the credit spectrum -- labeling them superprime, prime, nonprime or subprime -- while Ford Credit used its traditional model to assess customers. The study then compared those credit ratings to the borrowers' actual payment history. Ford Credit declined to give the number of accounts studied, but said it was a "statistically reliable sample size."
The study found that ZestFinance's approach was more accurate in predicting the consumers' actual payment performance than Ford Credit's traditional model.
Ford Credit was quick to say that this doesn't necessarily mean easier credit terms for car buyers. If some folks who looked like risky borrowers now look acceptable, others might now look more risky.
So this may not mean much for dealership F&I managers. But for automotive lenders, it means a lot.
The bandwagon is rollin' down the road, folks. Time to jump on.