A recent article in American Banker discussed the move toward an increased focus on the use of alternative credit scoring data by some lenders. For many banks it has typically been considered an aid in helping score the underbanked population, but more recently lenders have recognized that its use can be expanded to mainstream consumers. The article expressed that the use of non-traditional data sources has not become an industry wide trend yet. I’d like to share some reasons why it should be.
Credit scores today are arguably less reliable than they have been at any other time in history. The latest recession bulldozed those deemed worthy of credit prior to the financial collapse and pushed them out of the acceptable risk range. Job losses contributed heavily to scoring changes for those normally considered a good credit risk when they fell behind on monthly payments or watched their homes move into foreclosure. Those same consumers hit hard during the recession are climbing their way out from being underwater and are a good risk again. Their credit scores just don’t reflect that. I’m not suggesting traditional credit scores should be abandoned entirely, but there is no better time to consider incorporating new data sources to get a more comprehensive picture of consumers.
Alternative data sources can be used to pursue underbanked consumers and fine-tune decisions at a granular level that traditional data sources do not provide. Having more information gives banks the ability to approve more accounts and reduce losses by better identifying those who pose a significant risk. There are additional benefits of utilizing alternative data beyond qualifying more consumers. These include fraud reduction, lower screening costs and more predictive credit decisions. More data strengthens the underwriting process and helps segment customers for marketing campaigns.
Banks want to revisit lending segments that they moved away from during the recession. Most raised their credit score cutoffs during the downturn and want to see if they can safely lower their cutoff to expand their pool of eligible borrowers without increasing risk. This can’t be accomplished in today’s market with a traditional credit score alone. Lenders need more complete background data in order to make the best credit decisions. Using alternative data gives banks more account opening options and a richer perspective on customers by providing data not previously available to them. It is imperative that lenders also have a framework in place that supports the ability to easily incorporate numerous different data sources into the decisioning process. Adding functionality that facilitates instant decisioning, cross-sell and the ability for business users to make modifications to logic quickly as the market changes, complete the overall package for banks.
Banks can maximize every customer interaction, optimize their data selection and improve profitability by integrating with a variety of data sources such as professional licenses, asset information, education, utility records, rent payments, fraud data, address changes, collections data, pay day lending, lien information, etc. Alternative data provides increased visibility in all aspects of the customer life cycle, from origination, account management all the way through to collections.
It’s not a question of whether lenders should be using alternative data, but how soon they can start incorporating it into their decisioning processes. Lenders can be more accurate when making decisions in the new credit world when they have more information to work with. Now is the time for lenders to take advantage of the wealth of data available in the market today and put it to work for them.