How alternative data can help expand opportunities and allow banks to acquire new account holders

There is much discourse regarding the applicability of alternative data in credit decisioning. However, there needs to be more focused discussion on how alternative data can expand opportunities for recent college graduates and how banks can leverage this data to target future college graduates.

Most college graduates fall into the Gen Z cohort. With nearly 4 million Gen Zers expected to open accounts annually through 2026, this customer segment poses a potentially profitable market opportunity that banks should pay attention to. 

Banks may be facing the challenge of gaining new customers 

Banks may need help to acquire new customers and account holders in today’s challenging landscape. This situation can be linked to several factors, including consumers across generations seeking a more personalized and seamless digital banking experience.  

Yet, despite an industry-wide push to digitally transform, some banks still struggle to offer a digital service that effectively elevates the banking experience, potentially causing their customer acquisition and retention rates to plateau.  

The slow adoption of technology to support user-friendly mobile and online banking, along with a lack of convenience and 24-7 accessibility for lending needs at bank branches, can cause fissures in financial institutions’ (FI’s) relationships with current account holders while also deterring new customers. 

Moreover, various options are available in the current market, ranging from traditional banks and lenders to credit unions and peer-to-peer lending. More options for banking only increase competition, and banks that fail to adapt to meet customer preferences risk shrinking revenue and a loss of market share.  

Should students be categorized as low-moderate income borrowers? 

Although there could be crossover between students and low-moderate income (LMI) consumers, there is a difference. Higher education students may have a potential for higher future earnings. This could distinguish them from the LMI group, which is often associated with the use of alternative data—an advanced degree can point to graduates having the ability to consistently repay loans, despite initially having minimal or limited credit. 

Recent graduates are just starting their careers, which may explain why they have limited credit scores, whereas the LMI populations likely have a longer financial history chronicling their low credit scores or no credit history at all. These instances of low or no credit history can be attributed to various reasons, such as a lack of access to traditional credit products or financial hardships. 

Regarding exhibited financial behaviors, recent graduates likely have different spending and saving habits than LMI populations, potentially impacting the type of alternative data used to assess creditworthiness. For example, recent graduates might have higher expenses related to education and career development. LMI individuals, on the other hand, may place fiscal priority on essential needs like housing, utilities and food. 

Nevertheless, income and employment verification is essential for both groups to help establish credit. In the same vein, verification of education can be a beneficial factor to consider in the decisioning process.  According to a 2023 Equifax study, borrowers with verified higher education degrees are 28% less likely to miss multiple loan payments when compared to those without degrees,* revealing that higher levels of education can correlate with more favorable loan repayment rates.

Additionally, the same study showed that postsecondary degree holders who make between $30,000 to $60,000 per year have the same likelihood of loan repayment as consumers without a postsecondary degree who earn between $60,000 to $90,000 per year.  

Lenders can unlock opportunities and realize portfolio growth with Gen Z college graduates  

Alternative data has the potential to lead to bigger returns by helping banks expand opportunities for lending and say yes to a larger pool of consumers while creating and fostering long-term relationships, thereby leading to the acquisition of lifetime customers.  

Banks that can persuade recent graduates to become customers may open the possibility for a long-term opportunity to cater to that person, especially since 27% of Gen Zers prioritize building credit. Customers who trust banks that can provide them with tailored loan terms by using alternative data may be more willing to remain with a bank or credit union as a lifetime customer.  

FIs need to go beyond being tech-oriented to acquire and retain customers  

In addition to being tech-oriented and offering more flexible products, banks must consider the following to acquire and retain account holders:  

• Consumers likely prioritize the convenience and accessibility of financial services that are available anytime and anywhere through digital platforms. 
• Improving customer service through trust, communication and transparency helps build more robust, long-term client relationships. 
• Reevaluating credit and loan decisioning structures and processes to cater to consumer preferences can lead to greater reach and more consistent financial inclusion.  
• Using alternative data (such as verification of education) to help predict loan affordability can help give banks an advantage over other lenders that may not be fulfilling consumer needs. 

To alleviate stalled customer acquisition rates, banks should look to groups that present an opportunity for growth. Gen Zers, especially recent graduates and current students, may present a unique opportunity for banks to connect with more account holders and form long-lasting relationships.

Joel Rickman is the senior vice president of verification services at Equifax Workforce Solutions. 

*Equifax 2023 Internal Data Study based on data from The Work Number® database over a 12-month period. The study was conducted on a population of non-prime borrowers who obtained unsecured personal loans ranging from $3,000 to $40,000.