Why Alternative Data is No Longer “Alternative” for Credit Unions and Community Banks

IN THE LENDING WORLD, ALTERNATIVE DATA - FAIR CREDIT REPORTING ACT-COMPLIANT INFORMATION NOT INCLUDED IN A TRADITIONAL CREDIT REPORT - has gone mainstream and is no longer viewed as “alternative”. For any financial institution looking to offer the most opportunities to its customers, maximizing use of alternative data sources—including telecommunication (telco), utility, and specialty finance data—in credit assessments is essential. 

This valuable and insightful data could help an additional 8.4 million previously unscorable consumers become scoreable, according to a 2023 Equifax Access to Credit and Alternative Data report - creating opportunities to potentially extend more credit to existing risk profiles; expand addressable lending markets; promote equitable lending and consumer financial health; and build customer and member loyalty and lifetime value. 

“Credit unions and community banks play an incredibly important role, with their members, customers and communities and those looking to expand their relationships and increase the overall lifetime value for their customers and members must include alternative data in their loan decisioning processes in order to compete with larger financial institutions for more lending opportunities,” said Tammy VanWambeke, Senior Vice President of Financial Services and Enabling Technology, Equifax. “Lenders using new risk scores that leverage alternative data to optimize model performance see a 17% predictive lift across portfolios and up to a 7% increase in approval rates without increasing risk.”

Bringing in new customers and/or retaining members is even more top of mind for credit unions and community banks currently, as elevated interest rates, lingering inflation, and rising debt-to-income ratios have made borrowing more expensive and meeting financial obligations more difficult. Knowing these audiences and their businesses allows these smaller institutions to offer personalized services that focus on specific needs, including support in managing credit and outstanding debts and providing more borrowing options at competitive rates. Using alternative data sources to extend credit can help these smaller lenders serve a community more comprehensively, and create a lifetime relationship with more customers. 

Equifax is committed to enabling inclusive financial opportunities that move people forward. A single financial opportunity can be a critical first step to establishing individual financial health that can change the trajectory and livelihood of families and communities for generations. Using alternative data can help community banks and credit unions extend more of these opportunities to spur positive economic change.