Credit card issuers and other lenders’ attention to alternative credit-scoring data–information not provided by the three major bureaus–has intensified after the financial crisis spotlighted what some have called an over-reliance on traditional credit scores. A few are finally going the extra step and openly using this data.
Capital One Financial Corp. is one lender that is walking the walk, and observers say other big banks are ramping up their testing and evaluation of alternative data sources, moving closer to implementing them in everyday credit decisions.
“There’s definitely more of an appetite for what I would define as untraditional credit report information,” says John Ulzheimer, president of consumer education at SmartCredit.com. “Lenders realized that solely depending on traditional credit file information only goes so far.”
Alternative data providers such as L2C Inc. and PRBC Credit Reporting Agency, 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 history, utility bill payments, payday loan payments, property records and employment information.
They were designed to help telecommunication providers, retailers and other companies extend credit to consumers who had little or no credit history.
At the onset, big lenders shied away from such data because so-called underbanked consumers were not a target market for many banks. Further, these sources of alternative information were largely untested in terms of their predictability.
But in the last few years, many in the financial-services industry have realized the application of such data goes beyond just underbanked consumers.
“As we came out of the downturn–and even in the downturn–what they realized is that the data could help them across their entire book of business, and then it became a much bigger prioritization,” Mike Mondelli, founder and chief executive of L2C, said in an interview. “So they tested it more completely.”
Equifax, Experian and TransUnion all have made inroads in adding new sources of information to their databases, including rental, employment, and asset and income-verification data. And TransUnion and Equifax have formed strategic partnerships with L2C to provide its data as an add-on service to clients.
“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 using either L2C’s data or are in the pilot phase, he said.
“That doesn’t mean they are using it across their entire business” just yet, he said. “But they are starting to use it.”
At Capital One, “it’s been in our DNA to look at alternative data,” Peter Maynard, vice president of Capital One’s consumer bank, said at a recent conference in New York, adding that the company first began analyzing alternative data sources in the late 1990s. “Capital One immediately understood that there were underserved markets that we needed to look at.”
Mostly, Capital One relies on its own proprietary models, incorporating data from a variety of sources, including L2C and the Census Bureau, Maynard said. The company does not rely on FICO scores–the standard credit score from Fair Isaac Corp.–very often, 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 are still primarily used to determine the credit worthiness of consumers outside of the “super prime” category, or those with a FICO score of 780 or less, Mondelli said.
Mondelli said banks are particularly interested in revisiting segments they exited during the downturn.
“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.”
Christine Pratt, a senior analyst at the Aite Group, says, “This is an opportunity to take a better look in the consumer market and market to folks you wouldn’t normally have chosen. It’s about expanding the pool of eligible borrowers without expanding the credit risk in a marketplace where it’s not easy to do either one of those.”
Some lenders would not disclose their data sources. JPMorgan Chase & Co. spokesperson Gail Hurdis, wrote in an e-mail that “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.”
Both Bank of America Corp. and Discover Financial Services say they use only traditional credit-bureau data. Others, such as American Express Co., acknowledge that they have looked into alternative data, but are not using it.
“These alternative sources for credit don’t seem to work with what we need,” says Marina Norville, an AmEx spokesperson. “But that’s not to say we won’t be open to other sources in the future. … This kind of information can certainly prove to be valuable.”
Some experts would not call this a definitive trend just yet.
“It will take a little bit more time for it to become more mainstream,” says Ali Raza, executive vice president of Speer and Associates, a financial services consulting firm. “I’m not too sure that the larger institutions want to go there quite yet.”
