How Alternative Data is Making Credit More Available to Consumers
By: Michael Day, LEND360 Policy Director
Without credit, it is nearly impossible to buy a home or start a business. Many Americans face barriers accessing credit or pay more for credit. At times, this is due to a record of late payments or trouble documenting income. Still, a growing group of consumers either have no credit history or possess a history that is inconsistent. It is estimated that this affects 45 million consumers. Many in the fintech community are using alternative forms of data to expand access to capital. Much of this data includes everyday elements like a cell phone bill, checking account activity or rental history. While this data may not seem unique, when teamed with new modeling techniques, alternative data can play a key role in credit decisions. This year at LEND360 we will feature an entire track dedicated to marketing, data, and analytics.
This can help augment a borrowers’ credit file, creating a more predictive profile of an applicants’ ability to repay, allowing lenders to approve borrowers whose FICO scores are below an institution's traditional threshold. Recent research by LexisNexis found that when alternative data is factored into a borrowers’ existing credit history, 20 percent of those borrowers qualify for a loan with better terms and conditions.
One group who has benefited from alternative data are millennials. This group has seen the most significant impact from alternative data. Many of these borrowers are new to the credit world and do not yet have a traditional credit history. Alternative data has allowed lenders to gain a better understanding of changes in this demographic’s borrowing habits, that if only examined through traditional credit models, can skew these profiles. This has helped to build these millennials credit histories, changing the way lenders view this segment of the market.
With any new sector, there are always challenges, which is why it is important that the data used is fair, accurate and verifiable. One of the early concerns identified was the quality of data. One solution to this challenge is partnering with consumers, empowering them to have control over their own data. This is accomplished through instituted mechanisms by which consumers can input data that may be missing. This increases the ability for a complete and comprehensive picture, improving the overall quality of data.
There are also potential barriers. Regulators have, at times, been overly cautious and communicated inconsistently with lenders on the role that alternative data can play. This creates uncertainty, discouraging lenders and ultimately limiting the availability of credit to consumers.
The use of alternative data in credit decisions and scoring models can play an invaluable role in the entire financial service ecosystem – increasing access to services, reducing fraud, lowering defaults, and improving overall efficiencies in providing loans. While labeled “alternative,” when examined closely, this data is not all that “alternative.” Where the paradigm shift has occurred is in how this data is being employed, and the modeling techniques that have successfully been developed. These aid lenders in making more accurate credit decisions that translate into better credit options for consumers.
If you are a lender looking to meet a service provider, or a service provider looking to market to lenders, LEND360 is where you need to be.