Alternative credit data is often used as a catchall term to describe financial data. This data is typically sourced from alternative financial service providers and account aggregation, on consumers who are not abundantly reported on mainstream credit reports.

Other insightful details may include an individual’s income and employment history, coming from applications underbanked individuals submit for other alternative financial services. The aggregation of all these peripheral particulars can help paint a picture of someone who is responsible, but may have experienced a financial setback or two. Other thin or no file consumers may include immigrants, young consumers new to the credit market, and other extenuating circumstances.

With the right credit data, banks and other financial service providers can generate more revenue with dependable underbanked consumers.

The challenge for lenders, however, has been determining who among the underbanked are creditworthy, despite an applicant’s lack of traditional credit data. While thin file, no file and other credit-challenged consumers have been relegated to one homogeneous group in the minds of some, the data tells a different story.

Alternative credit data is a relatively new term, and it’s what more lenders are relying upon to make a financial decision on an applicant. The data’s purpose is to help lenders gain a more holistic view of an underbanked consumer’s stability, including their ability and willingness to pay back loans – all of which are known in banking terms as “capacity.”*

The capacity and previous financial behavior of two consumers with subprime credit scores often vary significantly. Alternative credit data helps delineate those differences.

Where Does Alternative Data Come From?

Acquired from a number of sources, this form of nontraditional data can originate from a number of sources. Different aggregators tend to acquire most of their information from one or a few of the following:

Alternative tradeline data records, including:

  • Application inquiries
  • Credit performance data
  • Consumer stability data
  • Employment and income data (non-verified)

Public records, disclosing:

  • Property ownership
  • Bankruptcies, liens, judgments
  • Driver’s license data

Bank verification data, showing:

  • Banking relationships
  • Account types

Utility or telecommunications records, revealing:

  • A consumer’s contact details
  • Timeliness of payment

Employment records, disclosing:

  • Whether or not a consumer has a job

Apartment rental records, divulging:

  • Rental lengths
  • Payment history

Alternative Data Yields Opportunity for Real People

Meet Amber, a single mom

Many consumers turn to payday loans to get the cash they need for emergencies.

Meet Amber: a single mom, working as a secretary in a dental office to make ends meet and provide for her family.

Amber brings home $15 an hour, just enough to pay the bills and provide food and shelter for her family. While her savings may not amount to much, she has some money saved for an emergency.

One day, on Amber’s way home from work, she gets into a car accident. Even though her bills are always paid on time, Amber can’t afford an expense like this. Her credit score is below prime due to a recent divorce and she does not qualify for traditional credit.

In order to get to work on time, she must find a way to pay the body shop to fix her car. Her meager savings won’t be enough, so Amber turns to a payday loan to get the cash she needs.

Although her loan had to roll over twice in order for Amber to pay it off, she consistently made payments on time.

Underbanked consumers like Amber need alternative financial services to get by, but that doesn’t mean they are unreliable.

Using alternative credit data can help banks tell the difference between consumers like Amber and ones that represent a higher risk. For millions of people, the loan that Amber repaid wouldn’t be considered a marginal or supplemental example. For them, it may be their only record of credit.

Increased Visibility on an Untapped Consumer Market

With the right alternative credit data, banks can distinguish a reliable applicant from a high-risk consumer with no intention of repaying their debt.

Clarity’s alternative credit data comes from a variety of financial service providers, including auto financiers, short-term installment lenders, small-dollar credit lenders, online small-dollar credit lenders, title lenders, rent-to-own, retail financing and more.

However, there is a difference between alternative data and alternative credit data. While the traditional bureaus have access to some alternative credit data, it is by no means comprehensive.

While the term “alternative data” is a general term typically mined from general sources, the more specified term “alternative credit data” comes from more specified origins. The former has been leveraged more by traditional credit bureaus from payment information on rent, utilities, cell phone bills and more. The latter supplements the former with details on alternative tradeline data records.

In recent months, traditional bureaus have acquired firms specializing in alternative credit data, including Experian’s purchase of Clarity Services.

One alternative finance credit bureau uses alternative credit data collected from government and institutional sources to provide the consumer’s rental history, utilities, and more.

The two largest analytics software companies in America define their alternative data as landline, mobile and cable payments, public records, and property information.

How Alternative Credit Data Impacts Your Underwriting

While all of this this information shows payment history on the necessities consumers may need to survive, it does not reflect their performance or consistency when paying off debts.

With Clarity’s alternative credit data, you have all the information that you need to decide whether or not a consumer has the ability to pay, and how well they have fared in repaying a debt in the past.

While alternative data, as defined by the credit bureaus above, may add incremental value in predicting the consumer’s financial performance, the best predictor of future credit payment is always previous credit behavior.

American Banker cited a CFPB report stating that 26 million Americans do not have credit history in the U.S. today.**** However, this information is based on traditional credit data. If these consumers are active in the alternative financial market, there actually is credit history on these underbanked consumers.

It’s a never-ending cycle for these consumers trying to raise their credit scores. The underbanked are denied credit by traditional banks because they lack a reliable credit history. They can access the funds they need for emergencies from alternative financial service providers, but even responsible repayment will not improve their traditional credit score.

The CFPB is pushing banks to reconsider the underbanked consumer segment.

“I personally believe banks and credit unions can be low-cost providers of small-dollar loans,” Mr. Cordray told The Wall Street Journal. “I think that working with banks and regulators involved, there would and should be an ability for them to offer decent products.”*****

How the Underbanked Consumer Can Help Grow Your Business

While banks are leery of lending to this consumer group, comprehensive alternative credit data can help them determine which underbanked consumers are reliable and which ones are risky.

Clarity’s data can help banks decipher the consumer’s intent to pay, willingness to pay, and ability to pay. As experts in underbanked consumer behavior, the right data can more accurately predict first payment default, likelihood of defaulting over time, and the capacity at which consumers can afford to pay back a debt.

In CFED’s 2016 Scorecard, The Steep Climb to Economic Opportunity for Vulnerable Families,****** the authors report, “On-time payment of credit obligations, such as credit cards, has improved steadily since the recession to just under 80 percent of credit users (i.e., adults with a credit file and credit score).”

Even though underbanked consumer repayment has increased, their access to revolving credit has not. On the other hand, prime consumers are oversaturated with available credit offers from banks and other financial institutions. Alternative credit data can provide an incredible opportunity for growth into an untapped market of reliable underbanked consumers while still managing risk.

Sources:
* http://www.businessdictionary.com/definition/capacity.html
** https://www.consumerfinance.gov/ask-cfpb/what-is-the-ability-to-repay-rule-why-is-it-important-to-me-en-1787/
*** https://www.experianplc.com/media/news/2015/alternative-data-to-credit-reports-utilities-and-rent-2015/
*** http://www.americanbanker.com/bankthink/proceed-with-caution-on-credit-scoring-with-alternative-data-1074824-1.html
**** http://www.wsj.com/articles/cfpb-plans-to-complete-new-payday-loan-rules-soon-1455033481
***** http://assetsandopportunity.org/scorecard/about/main_findings/