Utilizing Alternative Data for Immediate Lift

Expanding portfolios is a clear objective for many lenders. But many financial service providers struggle with the fear of associated risks. What if there was a way to grow while mitigating the increased risk?

Alternative data, a tool used by many lenders, empowers financial service providers to identify and approve consumers who might have been overlooked using traditional credit decisioning scores and products.

New Opportunities

Alternative data differs from traditional credit data in that it consists of non-tradeline type attributes. For example, instead of reporting on active and inactive credit lines, alternative data may consist of banking and payment history, utility payment history, rental payment history, phone usage, and payment history. While these data sources are not new to the industry, their increased usage and rapid adoption certainly are. Over the last decade, lenders and financial service providers have begun incorporating these types of alternative data solutions into their underwriting models in an effort to level the playing field and provide opportunities to consumers who may have not had financing options previously. While this obviously benefits underserved consumers, this also benefits lenders by providing access to an untapped and underserved market. That being said, why is alternative data so powerful?

Why You Need Bank & Payment Data

One of the key benefits to alternative data is that it can tell a different story about a consumer. It can help fill the voids left by the traditional bureaus.
Alternative data can tell a fuller story of consumers typically overlooked by traditional credit bureaus, providing valuable insight into those lacking credit history. The credit-invisible borrower is often penalized for lacking information. But that does not mean they lack the ability to pay.

Similarly, alternative data can help with financial inclusion and overcoming biases. A recent study by the CFPB revealed that “consumers in majority Black and Hispanic neighborhoods, as well as younger consumers and those with low credit scores, are far more likely to have disputes appear on their credit reports.”1 It is clear that the more layers of data from multiple sources you have on an applicant, the more precisely you can determine their creditworthiness.

Alternative Data for Immediate Lift

Using alternative data can more calculate an applicant’s current financial status and the factors that affect their ability to repay a loan. A great example of this would be with banking and payment data. Unlike traditional credit reports and scores, which will mainly assess the credit risk of a consumer based on historical tradeline data. Banking and Payment Data assesses the overall banking reputation of a consumer, as well as their interactions with merchants across various industries. This provides a more realistic picture of their everyday behavior. It is also less likely to contain errors, as it draws directly from data associated with the consumer. This is done through assessing transaction types, transaction amounts, velocity of transactions, and outcomes of transactions, to predict the outcome of future payments based on the consumer’s history.

To learn more about ValidiFI’s predictive bank account and payment intelligence, contact us today.

1 CFPB Finds Credit Report Disputes Far More Common in Majority Black and Hispanic Neighborhoods https://www.consumerfinance.gov/about-us/newsroom/cfpb-finds-credit-report-disputes-far-more-common-in-majority-black-and-hispanic-neighborhoods/