Part 1: Alternative Data – Casting a Wider Net to Unleash Improved Credit-Scoring by Ronald Whyte
September 7, 2018
A data revolution is underway for lenders. This transformation will have a profound impact on how consumers get access to credit by allowing lenders to make better-informed, more inclusive underwriting decisions. It could even throw open the door to underbanked and credit-invisible consumers by adding new measures of creditworthiness through alternative data sources.
Common players in the industry already have developed scores that include alternative data that is intended to present a more comprehensive view of a consumer’s eligibility. But there are still concerns that they haven’t gone far enough. For customers without a long credit history (“thin file”), does a customer’s track record of regularly paying rent or utility bills and maintaining a healthy checking account balance not prove financial responsibility? What if a consumer wishes to add positive data that might not otherwise be noted?
Missing the Opportunity
Credit scoring is typically a measure of the likelihood that a customer will become severely delinquent or default on a credit or financial product. ChexSystems’ QualiFile score, as an example, predicts the likelihood that a consumer will have a demand deposit account (DDA) forcibly closed within the first year of opening. If a consumer has little or no data available, this can result in fiscally prudent consumers being refused a product or charged a higher rate.
There are many underbanked and credit-invisible consumers in the United States. Many of these consumers have years of good DDA performance, pay bills, cash payroll checks and use prepaid cards. Not including these new forms of data may result in missed opportunities as financial institutions fail to start or deepen financial relationships.
A Wider Net for a More Complete Picture
As the world becomes more digitized, an ever-increasing volume and variety of data is being created. This is especially true of financial information. Coupled with increased automation, a broader array of alternative data sources can be accessed and analyzed to make more informed financial decisions. Smarter underwriters are realizing this, and are looking to checking account and bill payment histories to make better evaluations on an individual’s credit worth. In addition, smart financial institutions use this data to gain “wallet share” by positioning additional products that match the consumer’s lifestyle needs.
Use the comments below to tell us about data you think should be included in reviews. And come back soon for Part 2 of this topic in which I’ll review additional alternative data sources that financial institutions could use.