Alternative Data for Credit Decisioning:
What Lenders Need To Know in 2024
The latest trends in alternative data for credit decisioning focus on expanding data sources beyond basic bank transactions. Lenders are looking at utility and telecommunications bills, open banking data, and social media data to gain a more holistic view of applicants, particularly those with limited credit history. Additionally, lenders are using alternative data not just to reduce lending risk but also to get faster loan approvals and to create new loan products tailored to the financial realities of the gig economy.
Types of Alternative Data for Credit Decisioning
Alternative data for credit decisioning includes a range of non-traditional information sources that provide deeper insights into an individual’s financial behavior and reliability. This includes utility and rent payment histories, which reflect consistent bill-paying habits; telecommunications and e-commerce data, which offers a view of spending patterns and financial stability; and social media activity, which can indicate lifestyle and behavioral traits. Additionally, bank transaction data, employment history, and educational background can be used to assess income stability and potential. The table below summarizes the types of alternative data lenders can use for credit decisioning.
Types of Alternative Data for Credit Decisioning | ||
---|---|---|
Type | Description | Credit Decisioning Uses |
Utility Payments | Payments for electricity, gas, water, and phone bills. | ✔ Assessing payment behavior, timeliness, and reliability.
✔ Supplementing traditional credit data for a more holistic view of financial responsibility. |
Rent Payments | Rental payment data reported by landlords, utility companies, or specialized data providers. | ✔ Evaluating repayment history for borrowers with limited traditional credit history.
✔ Predicting future loan payment behavior based on past rental payment reliability. |
Employment History | Data from payroll providers or freelance platforms verifying income from various sources. | ✔ Assessing income stability and creditworthiness for borrowers with non-traditional employment.
✔ Supplementing traditional income verification methods. |
Public Records | Public-sourced data like court records, tax liens, and bankruptcies. | ✔ Identifying potential financial risks associated with past legal or tax issues.
✔ May be used for fraud detection or verification purposes. |
Social Media Activity | Social media profiles and interactions. | ✔ Gauging behavioral patterns, lifestyle choices, and stability.
✔ Validating personal information. |
E-Commerce Data | Online shopping and transaction history. | ✔ Understanding spending habits, purchasing power, and financial behavior. |
Bank Transaction Data | Checking and savings account transactions. | ✔ Analyzing cash flow, income patterns, and spending habits.
✔ Detecting financial stability. |
Retail Loyalty Programs | Participation in retail loyalty programs. | ✔ Understanding spending behavior, loyalty, and financial discipline. |
Healthcare Payments | Payments for medical bills and health insurance. | ✔ Evaluating payment behavior and financial burden.
✔ Understanding the impact of healthcare costs on financial stability. |
Crowdsourced Reviews | Peer reviews and ratings on platforms like Airbnb or Uber. | ✔ Gauging reliability, trustworthiness, and behavior in peer-to-peer transactions. |
Companies That Provide Alternative Data to Lenders
Companies that provide alternative data to lenders are instrumental in modernizing credit decisioning by offering non-traditional data sources. For instance, Experian RentBureau and CoreLogic supply rental payment histories, while Yodlee and Plaid aggregate bank transaction data to reveal financial behaviors. Equifax and TransUnion contribute utility and telecommunications payment data, enhancing traditional credit reports. These companies and others enable lenders to make more informed, inclusive, and accurate credit decisions by leveraging various alternative data sources. Here is a list of many of those companies.
Company | Alternative Data Provided |
---|---|
Experian RentBureau | Rent payment history |
Yodlee | Bank transaction data, financial account aggregation |
Zest AI | Machine learning credit risk models using alternative data |
Bankruptcy Watch | Bankruptcy information |
Plaid | Bank transaction data, financial account aggregation |
TransUnion | Utility and telecom payment data, public records, alternative credit data |
Equifax | Employment and income data, utility payments, alternative credit data |
LexisNexis Risk Solutions | Public records, property records, telecommunications data |
PointPredict | Bank account balances, assets, rent, utility, and subscription service payments, child support payments |
LenddoEFL | Social media data |
Earnin | Employment and income verification, real-time transaction data |
Kreditech | E-commerce data, social media data, bank transaction data |
Petal | Bank transaction data, cash flow data |
Clarity Services | Non-traditional credit data, subprime consumer data |
FactorTrust | Alternative credit data, short-term loan data |
CoreLogic | Rental data, property records, alternative credit data |
TrueAccord | Debt collection data, behavioral data |
Lenddo | Social media data, mobile phone data |
CredoLab | Mobile phone metadata, app usage behavior |
Nova Credit | International credit data, cross-border credit profiles |
Tala | Mobile phone data, behavioral data |
Credit Karma | Bank transaction data, financial account aggregation |
Acorns | Bank transaction data, investment behavior |
Albert | Bank transaction data, financial behavior |
SoFi | Employment and income data, educational background |
TruDecision | Alternative data and predictive analytics solutions |
Why Lenders Need a Robust LOS to Leverage Alternative Data
Lenders need a robust loan origination system (LOS) to effectively incorporate alternative data in credit decisioning for several key reasons:
- Data Integration: A robust LOS can seamlessly integrate multiple sources of alternative data, such as utility payments, social media activity, and bank transaction data. This integration ensures that all relevant information is considered when evaluating a borrower’s creditworthiness.
- Data Analysis: Advanced data analytics capabilities are essential for processing and interpreting vast amounts of alternative data. A robust LOS can utilize machine learning algorithms and artificial intelligence to analyze these data points, identify patterns, and generate predictive insights that traditional credit scoring models might miss.
- Real-Time Processing: Alternative data often includes real-time information, such as recent bank transactions or mobile phone usage. A robust LOS can handle real-time data processing, allowing lenders to make more timely and accurate credit decisions.
- Enhanced Risk Assessment: By leveraging a modern LOS, lenders can better assess the risk associated with lending to individuals who may lack extensive traditional credit histories. This enhanced risk assessment can lead to more informed lending decisions, reducing the likelihood of defaults.
- Scalability: As the volume of alternative data grows, lenders need a scalable LOS that can handle increasing data loads without compromising performance. A robust system ensures scalability, allowing lenders to leverage alternative data effectively as their business expands.
- User Experience: A well-designed LOS can streamline the loan application process for borrowers by efficiently incorporating alternative data. This can result in a faster, more user-friendly experience, improving customer satisfaction and increasing the likelihood of loan approval.
- Competitive Advantage: Implementing a robust LOS that effectively utilizes alternative data can give lenders a competitive edge by enabling them to offer loans to a broader range of customers, including those who may be underserved by traditional credit models.
- Regulatory Compliance: Incorporating alternative data in credit decisioning must comply with regulatory requirements, including data privacy laws and fair lending practices. A sophisticated LOS ensures that the use of alternative data adheres to these regulations, mitigating the risk of legal issues.
Getting Started
defi SOLUTIONS offers robust loan origination systems to capitalize on the benefits of alternative data in credit decisioning, ensuring accurate risk assessment, regulatory compliance, scalability, and improved customer experience. Defi’s platforms provide access to a broad ecosystem of third-party services and data sources that help drive lender success. These include alternative data providers such as Clarity Services, BankruptcyWatch, FactorTrust, LexisNexis Risk Solutions, PointPredictive, TruDecision, and Zest AI.