HOW COMMUNITY BANKS ARE USING ALTERNATIVE CREDIT DATA

 

Long-term relationships will always be the strength of the community bank. However, in this digital age, establishing those relationships and growing the business in a way that fits the bank’s portfolio is increasingly dependent on the smart use of data. Alternative credit data are opening the doors to new lending opportunities that community banks previously may have ignored or declined. 

 

The increased digitization of the economy creates a wealth of transactional data that, when securely acquired and aggregated, provides additional detail about an individual that informs their financial standing. Consider the types of common transactions that generate digital records and provide insight into an individual’s cash flow and ability to meet expenses. 

 

• Utility and mobile phone payments can demonstrate the ability to consistently meet monthly expenses or reveal irregularity that calls into question financial standing.
• Rental payments and changes of address data can confirm financial and residential stability or expose nomadic tendencies. 
• Employment history and income can be two of the most important criteria for determining creditworthiness. Consistency or advancements in each correlate with low risk.

Transaction histories revealed by these alternative data are helping community banks identify new lending opportunities, and to reduce lending risk, based on a more accurate and detailed understanding of applicants’ financial stability. A closer look shows how, with alternative data, community banks and borrowers benefit.

New Opportunity: Borrowerss With No Banking Relationships

Depending on the size of community, hundreds to thousands of citizens may have no established relationships with a bank. New arrivals to the workforce are trying to establish a financial foothold. Some who heretofore have been functioning entirely on cash transactions may be now seeking loans as a means of improving their financial standing. 

 

Millions of others, such as recent college graduates, may have little to no credit history. If any of these consumers apply for a loan, thin to non-existent credit files insufficient to calculate credit scores would likely disqualify them from obtaining a loan, based on traditional evaluation criteria.  

 

Alternative credit data opens the doors to new lending opportunities for community banks. When traditional bureaus close the door with a “no hit,” alternative credit data can offer a different perspective. Applicants who demonstrate consistent ability to meet financial obligations can be offered favorable terms. Applicants whose transaction history clearly indicates financial instability can be declined or offered loans that are priced for risk, in accord with a community bank’s credit policies. Alternative credit data offer community banks the opportunity to extend credit to more individuals and enhance the economic climate of the communities they serve.

Alternative Credit Data Supports Better Lending Decisions

Alternative credit data can complement traditional credit reporting to provide a more accurate picture of an applicant’s financial standing. Applicants with exceptional or very good credit scores can be fast-tracked for loan approval and obtain the best terms. Community banks may now use a broader range of data—both traditional and alternative—to assess the credit worthiness of applicants with good, fair, or very poor scores. Consider three scenarios:

Alternative credit data improve applicant’s creditworthiness

Alternative credit data for an applicant with a fair credit score who hasn’t missed any rental or utility payments during the past 18 months. With this information, a loan officer may determine that the applicant may be a lower risk than the traditional credit score would indicate. 

Alternative credit data decreases applicant’s creditworthiness

Alternative credit data for an applicant with a fair credit score shows payment inconsistencies. Although the applicant never missed a mobile phone payment, rental payments have been consistently late during the past year. Taken together, these data indicate the applicant may be a higher risk than indicated by the credit score alone.

Alternative credit data confirms applicant’s credit risk

Alternative credit data for an applicant with a very poor rating confirms the applicant is a significant credit risk. A loan officer can then apply the bank’s credit policies as well as knowledge of the local economic climate to either extend a credit offer with risk-based terms or decline the loan.

Alternative credit helps you grow the customer base simply by approving loan applications that would otherwise be declined. It also reduces lending decisioning risk by providing a more accurate assessment of an applicant’s financial position.

Incorporate Alternative Data Services

Community banks can incorporate alternative credit data into their loan origination process via integration with a growing number of alternative credit data services from Experian, LexisNexis, and TransUnion. Modern, cloud-based loan origination solutions make it easy to integrate alternative credit data into the decision process and automate much of the underwriting process, improving both speed and consistency of lending decisions.

With Alternative Data, Community Banks See New Opportunities

With the use of alternative data, community banks can address the needs of the communities they serve. Better insight into an applicant’s financial position reduces the risk of lending decisions and facilitates more lending opportunities.