Expanding Lending Horizons: Leveraging Alternative Data for Better Insights

While the world of consumer credit continues to evolve with the advent of newer forms of financing like fintech lending and Buy Now Pay Later, all types of lenders still face the same challenges: growing with new customers, managing existing customers, and mitigating risk in this dynamic market.

With expanding competition and an economic environment that has put a squeeze on consumer budgets, lenders are under increasing pressure to generate growth without raising risk. This has driven many lenders to look for additional data that can be used in their processes. Most lenders have become very good at wringing every ounce of useful information from the standard consumer credit files, but that only goes so far.

While the concept of alternative data is not new, the need for such data has become more pressing. The challenge often becomes finding reliable sources of alternative data that can be used for consumer credit related activities while remaining within the boundaries of regulatory and compliance requirements. There are many sources of alternative data in the market today, but how do you know which data sets are best for your organization?

As with all forms of data, it’s important to take a strategic approach to maximize the biggest return on investment. Here are three things to remember as you evaluate incorporating alternative data into your processes:

• How and Why You’re Using It Matters: Alternative data tends to work best with prime, near prime and subprime lending applications. Traditional lenders that use alternative credit data to make an offer to a consumer who is doing well managing other payments, like alternative finance loans, often find a customer for life. While traditional credit data is good at identifying consumers who are likely good lending opportunities, alternative data can reveal other potential customers who would commonly fall outside of the approval pool, such as those who are thin file or credit invisible.

• Think Beyond Just Credit Underwriting Risk: Many of these alternative data sources have permitted use across the full lending cycle - prescreen, originations, account management and collections. Many lenders have only focused on leveraging these data during the loan origination process, but in a time where delinquencies are increasing, it is prudent to expand that view to your current portfolio. This provides insight to additional risks and opportunities you may be missing by only looking at account review data from the core credit file.

• Re-evaluate Risk-based Pricing Strategies: With increased competition and automation, lenders understand that consumers have many options to choose from, and the convenience of online application processes makes it easier than ever to shop for the best rate. By leveraging alternative data sources, it may be possible to identify hidden information about a consumer that another lender will miss if they are only using traditional credit data. This can give lenders a competitive advantage when pricing loans, safely offering a better rate to win more qualified borrowers.

So, how does a lender go about taking advantage of these alternative data assets? There are two primary venues:

1. Bring alternative data attribute sets into your modeling/segmentation processes: Telecom, Cable and Utility and Alternative Finance databases available exclusively thru Equifax have attributes that can be used to develop risk models, just like the attributes from the core credit files. Both kinds of data sets track the same kind of behavior and can be integrated to provide a fuller picture in models.

2. Use a pre-existing score that leverages alternative data assets: If you do not have the appetite to bring in additional attribute sets and build new models, Equifax has created a set of scores that leverage both traditional and alternative data sources. These scores, known as OneScore, combine traditional core credit data with alternative data  and sophisticated modeling techniques to wring the most value out of these data sources. Lenders would typically use these scores as an overlay to their existing custom or industry standard scoring models to quickly leverage the insights gained from alternative data sources. By combining OneScore, a solution powered by the innovation of the Equifax Cloud, with a traditional credit score, lenders can score up to 21% more applicants and safely approve up to 15.5% more applicants.¹

Today’s lending market requires lenders to apply the broadest view of consumer behavior to generate a competitive advantage. Alternative data sources are a very effective way to gain these insights beyond what is shown on a consumer's core credit file.

If you are interested in learning more about alternative data sources from Equifax, check out OneScore.

Sources: 

1. Data from Internal Equifax Study