One of the biggest problems for banks and any lender for that matter, is to provide lending to creditworthy borrower. Namely, they try to avoid borrowers that could potential default on their loans. The creditworthiness of borrowers is evaluated on the basis of a predetermined evaluation criteria. It should be mentioned though that these criteria might be considered as an outdated. Especially after the boom in the fintech industry. Nevertheless, the fact remains that banks prefer borrowers who have adequate payment history. But what about potential borrowers lacking a payment history? Should they be eliminated at early stage of the application process? Sometimes banks should also evaluate the saving history of a potential borrower, good savers could be even better borrowers. The fintech industry is going through a boom period because it is applying new evaluation methods using non-traditional data.
Do you know a reason why disciplined savers have the potential to be great borrowers even though they may lack adequate payment history?
Banks are relying on the payment history as one of the factors that will eliminate the potential defaulters. The payment history shows the habit of a client to pay its monthly obligations to the bank (lender). A person whose report is showing late payments on a constant basis would be considered a riskier borrower, thus he/she will be charged a higher interest rate.
But this evaluation has one major drawback for a certain category of potential borrowers i.e. borrowers with no payment history. This type of borrowers is categorized by the banks as risky borrowers. Banks are not able to evaluate the payment habits of these borrowers.
But should the banks mark these borrowers as risky borrowers, when in fact it doesn’t know whether they will pay on time or not?
For these reasons banks should also consider the saving habits. Namely, if we look at the process of regular saving and the obligation to repay a loan, there are some similarities. At least similarities in the process of defining certain habits.
The habit and the way of thinking that is developed as a long-time saver and borrower is the habit of managing your budget. Namely, borrowers should adapt their spending habits in accordance to the portion of income left after paying the monthly payment. Meaning that the borrower has the habit of taking a portion of his income each month and give that money to the bank.
Savers have the same habit as well. Savers have also adapted their monthly budget. They are making payment to the bank each month. But the difference is that their payment goes on the savings account instead for a loan repayment.
If we consider the evaluation criteria of the bank in terms of a payment history, regular savers without payment history could be high quality borrowers. Although they do not have the history of repaying a loan, they do have a history of separating a portion of their income. Meaning that a loan i.e. a monthly payment will not impact their spending habits. They have already adapted their monthly budget. Also their spending habits are in accordance to the portion of income left after they have deposited money.
If regular savers take out a loan, the difference would be that they would make payment towards the loan instead of making payment towards their savings account.
Thus, in times of increased competition, banks should reconsider their evaluation criteria regarding the riskiness of borrowers. Regulars savers without payment history could turn out to be less risky than borrowers with irregular payment history.
On the other hand, savers should also be more aware about their value for the lenders. Namely, they should avoid being charged and interest rate at the higher end of the spectrum. Why paying more just because you haven’t had any loan? Savers do have payment history but the payments were going toward the savings account. Therefore, regular savers have made the same commitment as borrowers. Borrowers have the commitment to repay a loan, savers have the commitment to increase the balance on their savings account.