Lenders are focusing increasing attention on alternative credit scoring data in the wake of a financial crisis in which critics accused them of relying excessively on traditional scoring methods.
Capital One Financial Corp. is a leader in incorporating the new data, but other big banks are also ramping up testing and evaluation as they edge toward adding new methods to their credit-scoring processes, industry observers say.
"There's definitely more of an appetite for what I would define as untraditional credit report information," said John Ulzheimer, president of consumer education at SmartCredit.com. "Lenders realized that depending solely on traditional credit file information goes only so far."
Alternative data providers like L2C Inc. and PRBC Credit Reporting Agency, which is now owned by MicroBilt Corp., have been around for about a decade. They gather information that Equifax Inc., Experian PLC and TransUnion LLC typically do not, such as mobile phone service histories, utility bill payments, payday loan payments, property records and employment information.
They were designed to help telecommunications providers, retailers and other companies extend credit and other services to consumers who have minimal or no credit histories.
At the onset, big lenders shied away from using such data because so-called underbanked consumers were not among their target customers. The predictive value of the alternative data was also regarded as largely unproven.
In the past few years, however, many in the financial services industry have concluded that such data can be applied beyond underbanked consumers.
"As we came out of the downturn — and even in the downturn — what they [lenders] realized is that the data could help them across their entire books of business, and then it became a much bigger prioritization," said Michael Mondelli, co-founder and chief executive of L2C.
Equifax, Experian and TransUnion have all made inroads in adding new sources of information to their databases. This includes rental histories, as well as employment, asset and income verification data.
TransUnion also has formed a strategic partnership with L2C to provide its scores and data services to clients as an add-on feature. Equifax has an agreement with L2C to provide processing services that enable telecom providers to interface with the company.
"As an industry we believe we've moved away from the testing and the skepticism stage," Mondelli said. "We're firmly in early adoption, and it looks like we're going to be mainstream."
Fifteen of the top 20 consumer lenders are either using L2C's data or are in the pilot phase, he said.
Capital One began analyzing alternative data sources in the late 1990s and "immediately understood that there were underserved markets that we needed to look at," Peter Maynard, vice president of the company's consumer bank, said at a recent conference. "It's been in our DNA to look at alternative data."
Capital One relies for the most part on proprietary models, which incorporate data from L2C, the Census Bureau and other sources, Maynard said. The company rarely relies on FICO scores, the standard credit score from Fair Isaac Corp., he added.
FICO is a great tool, Maynard said, "but it's not really the best when it comes to finding what your customers are all about."
Despite the progress in its acceptance and adoption, L2C data is still primarily used to determine the credit worthiness of consumers outside the "superprime" category, meaning those with FICO scores of 780 or less, Mondelli said.
These days banks are particularly interested in revisiting lending segments they left during the downturn, Mondelli said.
"Say a 620 used to be your cutoff. Now your cutoff is a 680," he said. "A lot of companies are looking to determine if they can go back into that range safely, back to 620. They are using alternative data to figure out who the best folks are from that group."
"This is an opportunity to … market to folks you wouldn't normally have chosen," said Christine Pratt, a senior analyst at Aite Group. "It's about expanding the pool of eligible borrowers without expanding credit risk."
Some lenders would not disclose their data sources.
"As a standard operating practice, we regularly use and evaluate data, methods and tools to determine credit risk, and do not share details for proprietary reasons," JPMorgan Chase & Co. spokeswoman Gail Hurdis said in a written statement.
Bank of America Corp. and Discover Financial Services said they use only traditional credit bureau data. B of A said it continues to evaluate other sources.
Others, like American Express Co., say they have looked into alternative data but aren't currently using it.
"These alternative sources for credit don't seem to work with what we need," said Marina Norville, an American Express spokeswoman. "That's not to say we won't be open to other sources in the future."
Some experts are not ready to call the use of alternative credit data an industrywide trend just yet.
"It will take a little bit more time for it to become more mainstream," said Ali Raza, executive vice president of Speer & Associates, a financial services consulting firm. "I'm not too sure that the larger institutions want to go there quite yet."