How Alternative Finance Lenders Can Make Better Lending Decisions with a Single Score

Our experts, Anna Fisher, Vice President, Alternative Finance, and David Sojka, Risk Advisor, discuss the AltFi space and how alternative data can help AltFi lenders improve their strategies.  

Anna Fisher: David, it's great to see you. I recently had the opportunity to sit down with the leaders of several alternative finance (AltFi) companies to discuss their approach to acquisition, decisioning, and risk management. So I'm eager to hear your perspectives on the challenges facing alternative finance lenders today.

David Sojka: Thank you for having me, Anna. It's a pleasure to be here. As you know, I am a Risk Advisor here at Equifax. And prior to joining Equifax, I spent two years in charge of online lending strategies for a national AltFi lender. The AltFi space is growing rapidly, but it also faces unique challenges. Lenders need to balance acquiring new customers with managing risk and maintaining margins. And there's constant regulatory pressure from government institutions.

Anna: I completely agree. What we often hear from AltFi lenders is that they're finding it more difficult to confidently assess consumers seeking credit. They want to provide loans to consumers in need and grow their market share. But, they also need to be able to pivot their strategies quickly and adjust to changing markets.

David: And the market is certainly changing. Consumers have largely depleted their stimulus savings. They now face the dual challenges of high interest rates and persistent inflation. Many consumers previously relied on traditional lenders for financing. But now they no longer possess the necessary credit profiles to qualify for new loans. They are struggling to meet their existing debt commitments, and it has become more difficult for them to borrow more money. These folks are turning to AltFi lenders as a more accessible way to obtain cash.

Anna: Plus, more AltFi lenders are popping up every day, meaning increased competition. More than ever, AltFi lenders need the ability to fine-tune their decisioning strategies to bring on more customers that offer the right risk profile for their business.

David: That's where alternative data can come in. Many lenders already incorporate industry-specific data into their decisioning strategies. That includes data such as short-term installment and single pay loan attributes. This data can help lenders understand if applicants have successfully met any prior short-term lending obligations.

Anna: Yes, our DataX and Teletrack data provides these insights to companies offering short-term loans, lease or rent to own, some FinTech lenders, and others serving subprime consumers. But there are other alternative datasets worth utilizing to help proactively and accurately differentiate risk. 

David: Another type of alternative data that AltFi lenders can use is payment data for telecom, Pay TV, and utilities accounts. This data can provide an indication of whether a consumer pays his everyday bills on time. If a consumer isn't paying for these critical services on time, then they might not be a reliable candidate for a new short-term loan. Only Equifax has access to a unique consortium of this data through the NCTUE.

Some lenders, both traditional and AltFi, have started combining specialty finance datasets and telecom, Pay TV, and utilities datasets in custom models to differentiate which applicants should be approved. For many, however, that level of complexity is not operationally viable. 

Anna: Exactly! That’s why we recently launched a new risk score that incorporates all of these datasets: OneScore for Alternative Finance.

David: Right! OneScore for AltFi is a single score that not only leverages multiple datasets, but also scores more applicants. It is built using our latest modeling techniques, including gradient boosting machine learning and AI. And it’s purpose-built to better discern early and first payment default (FPD) risk on those applicants.

Anna: Excellent! AltFi lenders deal with short term loans, often under 2 years. These loans inherently come with more rapid repayment cycles, meaning there’s more at risk during a short period of time, and the losses hit quickly. 

David: OneScore enables lenders to identify those consumers that are less likely to pay even their first, second, or third bill. Lenders can weed out this high-risk population as part of their decisioning process, while still maintaining targeted approval rates.

Anna: How can OneScore help AltFi lenders address other complexities of their business, such as rapid seasonal cycles and multi-channel strategies?

David: A single score gives lenders more control and flexibility to shift their risk threshold based on their goals, market conditions, time of year, or other factors. It can easily be adjusted to either approve or decline more applicants so as to actively manage risk on a continuous basis.

It can also help differentiate applicants in conjunction with a lender’s current loan approval criteria. For example, those that might fail under existing criteria, but in fact present less risk according to OneScore, and vice versa.  

Anna: That level of agility is an exciting prospect! I know you and your team have already run some analytics on performance. What can AltFi lenders expect to achieve by incorporating OneScore into their decisioning processes?

David: The first thing is that AltFi lenders will be able to score more consumers. Our analytics show that OneScore for Alternative Finance can help lenders expand data coverage to reach nearly 90% of their market. The second thing is that they can confidently approve more consumers. OneScore can help boost approval rates by 20-40%.¹

Anna: Wow, that's impressive coverage. What are you seeing with respect to model predictability? 

David: Compared to other alternative data sources, our analysis shows that OneScore for Alternative Finance can better predict risk of near-term default. We looked at this for different lender types and found that OneScore can deliver:

• Up to a 48% lift in predictability for short-term lending²

• Up to a 66% lift for lease-to-own industries²

• Up to a 45% lift for subprime fintech lending²

Anna: That's very promising for some of our core customer segments. Let’s talk a bit about traditional credit’s place in AltFi lending. 

David: We know that many AltFi lenders don't use traditional credit data in their decisioning processes. There’s sensitivity to placing inquiries on a consumer's core credit file. But for those that do, there can be a benefit in combining it with alternative data. OneScore for Alternative Finance offers two models: one with just the two datasets mentioned above, and one that combines those datasets with traditional consumer credit attributes. Furthermore, the model can access this data by registering only a soft hit to traditional credit.

Depending on the target consumer client base, including the traditional credit data improves both coverage and predictive performance.

Anna: That's great to know. What do AltFi companies need to know about getting started with OneScore for Alternative Finance?

David: Incorporating new data into existing processes can take a bit of effort, but the payoff can be worth it. The ability to improve segmentation, score more consumers, and confidently approve more applications can have a big impact on lenders’ bottom line. OneScore for Alternative Finance is cloud-based and can be incorporated into existing processes via API. The best way for companies to explore OneScore for AltFi is to test it on their own data.

Anna: Thank you so much for your insights, David. 

Email riskadvisors@equifax.com or your Equifax account representative to request a complimentary data study and validation. Learn more about OneScore for Alternative Finance.

Sources

1. Equifax Data and Analytics, 2024

2. Kolmogorov–Smirnov statistic, Equifax Data and Analytics, 2024