By: 13 June 2024

A new study shows a large population typically treated as high-risk is actually creditworthy

Banks and lenders are missing out on £2.75bn of low-risk lending

A pilot study by UK data and analytics firm LexisNexis® Risk Solutions has revealed that banks and lenders may be denying loans to 80% of UK adults with thin credit profiles, when they are actually low-risk customers.  

This means that UK lenders could be missing out on nearly three billion Pounds of low-risk lending, assuming an average loan application of £500.

Analysis of 2.18 million people aged 18+ years living throughout Manchester ‘M’ postcode areas found that 22% (479,018) of the population lack the necessary credit footprint to be scored using standard credit scoring metrics. Traditionally deemed as high risk, the study found that nearly all people in this segment could be successfully credit scored using alternative data sources to supplement traditional credit bureau data. 362,000 people (8 in 10) in Manchester alone showed as low-risk borrowers.

Further LNRS data highlights the average value of short-term loans among people who struggle to access more mainstream finance. 56% of short-term loan applicants borrowed up to £999. This suggests that thin credit profiles and existing credit scoring methods could be causing banks and lenders to miss out on 5.5million creditworthy customers nationwide worth £2.75bn*.

Steve Elliot, managing director of LexisNexis Risk Solutions in the UK, said: “The pilot study shows that there are hundreds of thousands of people in Manchester alone that are being denied access to affordable lines of credit. There are millions more people in a similar situation across the UK, which is a missed opportunity for borrowers and lenders and doesn’t have to be the case.

“A limitation of traditional credit scoring methods is that they rely heavily on people having a history of credit usage. A whole host of people can be excluded from this methodology, including young people living with parents, divorcees, ex-pats and people who are new to the UK. A thin credit file doesn’t necessarily imply high risk of defaulting on repayments.

“Using alternative data to supplement traditional credit scoring methods can provide banks and financial services providers with a more nuanced view of an individual and a more accurate view of creditworthiness. It can include a range of insights from life events to modern credit seeking behaviours and some forms of consented data.”

In the most financially excluded area of Manchester, Moss Side, just 79% of the population has passed a traditional credit check in the past five years. Using additional supplementary data can increase scoring success for almost 10% of residents in the area to over 88%, the study showed.

Similar results were achieved in other areas affected by high financial exclusion rates, including Worsley (6.4% uplift), Swinton (5.2% uplift), Tyldesley (5.2% uplift) and Urmston (4.8% uplift).

*Based on LexisNexis Risk Solutions data showing 5.5million people nationally with thin credit profiles who could actually be scored as creditworthy if alternative data sources were used to supplement traditional credit bureau data. 5.5million x average short-term loan value of £500 = £2.75bn.

Image: LexisNexis

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Robert Welbourn
Robert Welbourn is an experienced financial writer. He has worked for a number of high street banks and trading platforms. He's also a published author and freelance writer and editor.