FAQ: What is Alternative Data?

Now more than ever in this rapidly changing market, alternative data solutions can help solve some of the banking and lending industry’s most significant challenges. But how are alternative data sources used and how do you choose the right one(s) for your organization’s needs?
 

Alternative data can help address current business challenges

Even five years later, lenders will continue to see the effects of the pandemic on consumer credit. Loan forbearances and payment arrangements will lead to inconsistencies in credit histories – impacting the credit assessment process. Traditional data will provide a limited view of a borrower’s ability to pay, amplifying the need for additional alternative data sources to help lenders make better decisions. 

A wealth of alternative data sources are available 

Alternative data provides a broader view of consumers to help lenders approve more customers. More frequent account reviews can help lenders stay abreast of changing risk levels.

There are two forms of alternative data sources that can help businesses with fraud prevention, credit risk assessment, collections and marketing needs: data repositories and consumer-permissioned data sources.

Data repositories

These databases contain large amounts of stored data. This data is updated based on predetermined frequencies, and requests can be made to retrieve information on demand.  

• Employment data enables lenders to verify employment and income information against a database of information contributed by thousands of small to large employers. Automated access to this data eliminates manual paystub and W-2 collection and helps streamline loan application processes.  

• Specialty finance data helps lenders expand credit access and broaden financial inclusion for more consumers. This information is particularly helpful during an economic downturn. In fact, some consumers may rely on alternative financing when they no longer qualify for traditional financing services. 

• Utility data is another type of alternative data that helps expand credit access and broaden financial inclusion for consumers. Many creditworthy consumers with thin credit files also have utility, telecom and payTV payment history. These sources can be used to augment credit risk assessment. 

Consumer-permissioned data sources

These sources enable lenders to access account-level data in real time with consumer consent. They can access information available from a variety of online accounts, including financial and other service providers. 

• Consumer-permissioned bank transaction data is used by lenders to gain visibility into spending behavior and patterns. This data provides the insights needed to assess credit risk, develop personalized offers, and monitor financial wellness.  

• Consumer-permissioned utility data accessed with consumer consent provides insight into the most recent 12 months of payment history from electric, natural gas, telecom, cable and water service providers. Ready access to consumer or small business online accounts enables lenders to verify identities, enhance credit risk assessment and automate processes involving manual utility bill collection.         

What should lenders do next? 

So, where does all this leave lenders? Before jumping into acquiring alternative data, lenders must first focus on the business problems they are trying to solve. A lender can then identify the data sources that best align with their business challenges and customer segments. 

Alternative data will help to provide additional insights and automated access to help improve decision-making and streamline internal processes. 

For more information on how alternative data can help your business, check out the latest alternative data resources.