It's time for credit unions to embrace alternative loan data

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It’s tough to lead a better life when you can’t change your economic conditions. In hopes of reducing poverty and spurring international economic growth, groups such as the World Bank have committed to advancing global financial inclusion and access. In recent years, fintech incubation, regulatory change and institutional innovation have combined to spur a movement for financial inclusion. With TransUnion, Experian and Equifax leading the charge, alternative data is playing a leading role in this revolution and driving innovation across the industry.

People often look at alternative data as a risk management tool. But its benefits extend far beyond risk mitigation, with advanced alternative credit scoring models providing the basis for extending credit to roughly 7.6 million consumers who were previously unable to attain a credit score.

Sharing personal data -- whether social media data, credit data or bill payment data – is a sensitive subject and such data needs to be handled very carefully. But what if I were to tell you that consumers are willing to share personal data in order to qualify for a loan? This is the reality today, and particularly for consumers who have had no meaningful access to traditional financial services. The Consumer Financial Protection Bureau (CFPB) estimates that 45 million Americans struggle to secure a loan because of insufficient credit history. The bureau also found that one in ten adults have zero credit history with any of the “big three” credit bureaus. Alternative data can help them create digital footprints — and is now seen as a chief driver in enabling financial inclusion — that financial service providers can capture and analyze to reach consumers with commercially viable services.

The acceptance and appeal of using alternative credit data to assess credit risk has rapidly grown across the financial services space. Not only has it displayed powerful predictive accuracy, but it has also shown the potential to extend credit to millions of consumers left out of the current system. For example, by layering in alternative data sources to a traditional risk score, Experian saw a 60 percent lift in approvals of near-prime consumers.

Arguably, the dominant source of alternative data is payment history records from utilities and telecommunications service providers. Consider the insights into credit risk that creditors and lenders can gain through access to a consumer’s name and address, payment due date, actual date of the payment, the amount due and the amount paid. This level of data can add to a profile and create a more comprehensive picture of an individual and their ability to manage timely payments.

The power of sharing

In light of prominent data scandals, consumers are open to the idea of sharing their da in the name of convenience and with their permission — if it can boost their approval chances for loan approval. Incorporating utility and telecom payment data into credit scoring models results in a more than 5% lift in approvals, according to a PERC study. Consumers demonstrate a willingness to benefit from these lifts.

A recent Urjanet survey revealed that:

  • A majority of consumers have multiple alternative sources of payment history . As much as 91% of survey respondents have at least one household service (electricity, water, telecom, cable) in their name
  • Consumers are willing to share utility and telecom data to boost their approval chances. Approximately 59% of the total sample population said they would be likely or very likely to share alternative sources of payment history with a lender to improve their chances of being approved for a loan. Consumers who had previously been denied a loan were even more willing (66%) to do so.
  • Consumers know how they want to share. The most popular method (46%) chose an automated process using an online form for security and convenience. Less popular options included uploading e-bills to a portal and emailing bills as attachments.

The power of sharing can’t be fully realized unless consumers themselves grant permission to access their data. Consent is vital, and user-permissioned data can only be accessed when the user opts in to share it. Essentially, individuals are in the driver’s seat on how their data defines them.

The upside for lenders

While the benefit of leveraging utility bill payment data as part of advanced alternative credit scoring models is clear for consumers, it might not be as apparent for lenders. But when you dive into it, alternative data can reduce lending risk by enabling lenders to quickly identify high-risk borrowers, as alternative data provides clear visibility into missed payments and transactions. Further, new credit data can give lenders a clearer overall picture of the borrower, including verifying their identity and most recent transactions.

Alternative data also has the exciting potential to help lenders tap into new revenue opportunities. With the use of alternative data, lenders can become more nimble and offer new loan products to qualified customers faster than waiting on traditional models. This is important when lenders think about keeping their customers and building brand loyalty, especially among Gen X, where only 8% are likely to remain loyal to their financial services providers after they have a negative interaction. Using the added visibility into spending behavior and patterns that alternative data can provide, lenders can build tailored products, offered at the right times, to keep borrowers enticed for a lasting relationship.

Most importantly, alternative data isn’t an excuse to recklessly extend credit to subprime borrowers. It’s a tool to uncover and target the credit-worthy applicants out of that pool. By relying on the right alternative data sources with proven predictive accuracy, such as utility bill payment data, lenders can safely extend credit to the right borrowers.

Alternative data presents a huge opportunity to improve financial inclusion. While a great upside exists for both consumers and lenders, there is still plenty at stake as best practices evolve for the good of all parties. Alternative data is still relatively new to the market, and financial institutions are still learning and exploring the most appropriate ways to leverage it. And consumers will play a big role in this revolution. Not only are they ready to share their data to positively improve their credit options, but they also expect that their data be handled safely, accurately and ethically, which is why user-permissioned access and models are essential. The power of sharing may seem like an elementary concept, but when it comes to alternative data, consumer empowerment and lender opportunities, it’s an advanced way of the financial future.

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Data and information management Data types Customer data Lending