Checking Account Opening: Going from Pass/Fail to Open
Too many individuals are denied access to checking accounts because their names appear on black lists, often because of past isolated instances. The Consumer Financial Protection Bureau (CFPB) Checking Account Forum took place in Washington, D.C., on October 8, 2014, to discuss this rise in account rejections and the potential of increasing access to checking accounts to all applicants.
“We are seeking, in particular, to explore ways that account screening can move beyond the use of specialized consumer reports as crude ‘black lists’ where consumers are turned down for an account simply because their name appears on the list,” said CFPB Director Richard Cordray in the October 8, 2014 news release, Prepared Remarks of CFPB Director Richard Cordray at Forum on Access to Checking Accounts. “We envision a process that better understands consumers’ needs and can provide an account that is appropriate to their personal circumstances.”
The pass/fail system
An estimated 10-15 percent of checking account applicants are routinely turned down because there is negative “closed for cause” information on these black lists. Placement on these lists can often stem from misunderstanding of consequences in a minor past dispute, simple uncorrected mistakes or victimization from fraud.
“In many institutions it’s either yes or no. You either pass or you don’t, and there appears to be too many don’ts,” said Ted Koerner, retail banking national account manager at Equifax, who attended the CFPB forum. “Too much weight is on the fact that there was a closed for cause report on file, which can remain for as long as five years,” he said.
Second chances and “open all” philosophies
The use of “second chance checking accounts” was also discussed at the forum. “Second chance checking accounts” provide checks, debit cards and access to direct deposit for riskier applicants but do not allow for overdraft protection. This “protects the bank because it won’t be out any overdraft expenditures, and it protects consumers because they’ll be less likely to get in over their heads,” Koerner said.
According to Cordray, having better data might help banks or credit unions “make more nuanced decisions” in account screening rather than giving a yes or no response. In the same vein, Koerner stated that the advantages of an “open all” philosophy toward checking account applicants, one in which the risk factor is managed on the back end by setting account privileges that fit the consumers’ financial potential. We would suggest that as long as one’s identity is authenticated, they are not on an OFAC list, and they are not suspected of fraud, then an account can be personalized for nearly every consumer. This is the key to Equifax’s Insight Score for Retail Banking (ISRB). ISRB is a deposit risk model built on highly predictive positive and negative payment behavior, which helps enable FI’s to fit customers with the appropriate account, and if applicable, the appropriate level of OD coverage.
The key ingredient to Equifax’s ISRB solution is the telecommunication and utility bill payment history that includes 25 million consumers who do not have a history of credit. This unique insight helps enable FI’s to consider every-day consumer payment activity over time, not just based on a single negative event. It’s this combination of insight that helps enable FI’s to say yes more often.
“This gets to the heart of the CFPB forum. It doesn’t leverage a so-called black list,” Koerner said. “Equifax’s Insight Score for Retail Banking gives financial institutions the insight to help deploy an open-all deposit account opening strategy that truly personalizes products as well as features of those products, in a nuanced manner.” Baseline checking account products should be available to most consumers. ISRB helps facilitate more for these consumers on Day One as well as provide a pathway (through account monitoring) to help enable standard account functionality over time.
Rather than blindly rejecting checking account applicants based on a closed for cause event, utilizing tools like Insight Score for Retail Banking can help evaluate their positive attributes, carefully account for the appropriate levels of risk and ultimately say, with more confidence, “approved.”
Image Source: Big Stock
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