Big Banks Wake Up to Life Beyond Credit Scores

The following headline from The Wall Street Journal is something of a Rorschach test for how a reader feels about the biggest U.S. banks: “JPMorgan, Others Plan to Issue Credit Cards to People With No Credit Scores.”

Someone who remembers the conditions leading up to the 2008 financial crisis might rightfully wonder if this is a ploy by large financial institutions to rope customers into onerous terms, just as they did with subprime mortgages. After all, this news comes when Americans’ credit-card balances have plunged by $157 billion since the end of 2019 to the smallest in four years; that’s a serious blow to banks’ bottom lines. Why not reach out to those with little-to-no credit history to make up the shortfall?

Then there’s the more optimistic view: Large banks, threatened by upstart financial technology companies that have gained market share during the pandemic, are simply doing what they should have done long ago. By sharing data on their customers’ checking or savings accounts, JPMorgan Chase & Co., Wells Fargo & Co. and others are finally offering opportunities to the roughly 53 million adults who don’t have FICO credit scores from Fair Isaac Corp., who disproportionately tend to be Black and Hispanic Americans. These people are sometimes referred to as the “credit invisible.”

At the risk of sounding like a Pollyanna, I tend to lean toward the latter explanation. While there’s undoubtedly self-interest on the part of the roughly 10 banks in widening the potential pool of credit-card applicants, it also speaks to a greater understanding of how longstanding barriers are holding back certain communities — and, by extension, the U.S. economy. If it takes financial incentives to align to finally knock these roadblocks down, so be it.

Consider JPMorgan, which is reportedly expected to be the first to use the shared data on deposit accounts when sizing up credit-card applicants. “It’s not a Hail Mary,” Marianne Lake, chief executive officer of consumer lending at JPMorgan, told the Journal. “It’s something that we know works.” This sounds similar to comments last month from CEO Jamie Dimon, who is co-chair of the Second Chance Business Coalition, which looks to foster employment opportunities for Americans with criminal records. “In this hypercompetitive global economy, we simply cannot afford to leave more than 70 million Americans on the sidelines,” Dimon said.

This is a nice sentiment, even though JPMorgan obviously remains selective in picking among those tens of millions. In 2020, about 10% of its new hires, or more than 2,100 people, had a criminal history, mainly because of transgressions such as disorderly conduct, personal drug possession and driving under the influence. They tend to work in transaction processing and lending and account servicing.

The same kind of scrutiny is likely under this pilot program, which is expected to launch this year and stemmed from the Roundtable for Economic Access and Change at the Office of the Comptroller of the Currency, an initiative started in the wake of protests after the murder of George Floyd. According to a Credit Sesame survey of 5,000 adults released earlier this year, 54% of Black Americans and 41% of Hispanic Americans reported having either a credit score below 640 or none at all. A paper last year from the Washington Center for Equitable Growth studied the lasting effects of incarceration on an individual’s credit score and wealth accumulation, in what was termed “the never-ending cycle.” As with job opportunities, some of these people deserve a second chance to get their finances back on track.

Here’s how the Journal describes who might win approval for a credit card:

The bank-account data will be reviewed after banks try to check applicants’ credit scores and find that they don’t have one, according to people familiar with the matter. Not having any returned checks, for example, could improve a person's chances of being approved.

The banks are also discussing eventually working with other data providers and aggregators, such as Plaid Inc. and Finicity, to consider an applicant's history paying rent and utility bills, some of the people said, adding that the banks decided to start with deposit-account data because it is more widespread and easily available.

Especially with the overall decline in credit-card balances during the pandemic, if banks can see that a person without a credit score has never had an overdraft, or has rarely, if ever, been delinquent on paying rent, then why wouldn’t they take a chance on offering a credit card? It seems like a no-brainer. JPMorgan reportedly has been using data from its customers’ own bank accounts to create risk models to approve financing for people with little or no credit history for years. But this government-backed plan seems wider reaching. 

Again, a little competition didn’t hurt in forcing the issue for banks, either. “We’ve seen a few financial startups create credit card products for consumers with no credit, or immigrants to the U.S. who are reestablishing credit here,” Sara Rathner at NerdWallet said in an email. She said this push by big banks may help in “redefining what it means to be ‘creditworthy.’” 

This shift is a long time coming. It likely won’t be without fits and starts — consumers might balk at granting megabanks unfettered access to their checking-account history, for example — but even extending an opportunity to build credit to a sliver of those without a FICO score is a step in the right direction. It has become clear that simplistic data screenings have knocked down minority communities and the U.S. economy as a result. Big banks should be applauded for looking for new ways to reach those that they might have previously ignored. Even if it helps their bottom lines in the end. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder.

©2021 Bloomberg L.P.

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