The landscape of lending is undergoing a significant transformation as banks and financial technology companies turn to alternative data sources to enhance credit decisions and mitigate fraud. With traditional credit bureau information becoming less reliable, especially for individuals with limited credit histories, the focus on alternative data has intensified.
During an August 2023 discussion for the “What’s Next in Payments” series, Kyle Becker, Chief Financial and Risk Officer at Concora Credit, emphasized the importance of integrating both credit bureau data and alternative data to strengthen lending practices. He stated, “Alternative data is super useful because it allows you to maintain or reduce risk while also providing access to credit to more people.”
The Shift Towards Alternative Data
Historically, credit bureau files have served as the backbone of credit assessments. However, these traditional sources often fail to paint a complete picture. Many consumers possess “thin” files, lacking extensive borrowing history, which excludes them from receiving credit. The introduction of alternative data aims to address this gap, offering a more nuanced view of potential borrowers.
One promising method is cash flow underwriting, which enables lenders to access consumers’ primary checking accounts to verify income and expenditure. This technique not only assesses repayment capabilities but also acts as a deterrent against fraud. Becker noted, “You’ll get to see some information about real-time ability to pay bills, and that’s very useful on top of credit history, especially if it’s a thinner credit history.”
The integration of alternative data creates a dual advantage: lenders can minimize their risk exposure while simultaneously granting credit access to a broader range of applicants.
Challenges and Opportunities in Data Utilization
Despite the potential benefits of alternative data, not all stakeholders have adopted similar strategies. The effectiveness of data can vary significantly, and model degradation poses a constant challenge. To combat this issue, Concora Credit employs data science to monitor its models, ensuring predictive power remains robust and determining optimal schedules for model updates.
Becker highlighted the necessity of not only having access to data but also the expertise to integrate and validate it effectively. “Having digital expertise, having strong data science, and having scale are all things that have made it so we can really take a lot of advantage of these alternative data sets,” he explained. Concora Credit evaluates approximately a dozen new data sources annually, seeking to enhance their decision-making processes.
Successfully integrating alternative data is akin to establishing a circulatory system within financial operations. Institutions face the challenge of determining when to leverage specific datasets throughout the customer lifecycle. While immediate applications exist in underwriting and fraud prevention, Becker believes the true potential of alternative data extends far beyond these areas.
“I’m a big believer that data science can help you everywhere,” Becker remarked. He pointed out that understanding customer inquiries through data can significantly improve service quality, ultimately leading to enhanced customer satisfaction.
The layered approach Becker advocates combines traditional credit bureau data with alternative sources, such as cash flow information, digital behavior, and fraud analytics. “We often find one or two new data sources per year that we add, and we just keep layering that into this stack in our underwriting and fraud defenses,” he stated. This iterative process allows Concora Credit to progressively enhance its services, making credit more accessible to individuals typically excluded from traditional lending.
In conclusion, while traditional credit bureau data will remain vital, the rise of alternative data promises to reshape the lending landscape. By harnessing innovative data sources, lenders can strike a balance between risk management and expanding credit access, ultimately benefiting both their institutions and consumers seeking financial opportunities.
