Apr 2, 2020
This article is a reiteration of Alternative Data and the Unbanked published by Oliver Wyman. The credit for any value brought by this article goes solely to the original authors, Peter Carroll and Saba Rehmani of Oliver Wyman.
Over the last several years, industry participants have searched for additional reliable data sources that can provide information on a consumer’s ability to honour their financial commitments. Alternative data shows significant potential to improve the status quo by enhancing the accuracy of existing scores (by achieving better risk separation), and by rendering visible many of today’s credit invisibles. Progress will come about through the private sector efforts of established lenders and credit bureaus, as well as the innovations of FinTechs, alternative data vendors and big data analytics firms, operating in the free market. There may also be a limited role for regulatory and/ or legislative initiatives. The end result will be better and fairer access to credit for individuals, with macro benefits for the whole economy
Alternative data may provide additional financial payment information on consumers or otherwise provide information with predictive power; some of the sources of such data are:
Having more alternative data is only valuable if it results in real incremental benefits; in this case, the benefits of using alternative data in addition to traditional bureau data, beyond just technical improvements to the credit score, should flow to both consumers and lenders.
Some of the key benefits that stand out for businesses include:
The value of alternative data varies by source. Data like rent payments have been shown to be predictive and may be available on many consumers with no credit file (although many landlords now demand credit scores for new tenants!) But the rental market is very fragmented and data are not uniformly reported. Therefore coverage is low. Public records data are available on even more people than those with files at the credit bureaus, so their coverage is very wide. However, since the information contained in public records is not explicitly focused on payments, it is not as predictive as credit bureau data; nevertheless, it also proves to be additive in scores developed from combined data sources.
The main characteristics of a good source of alternative data are these:
See how CredoLab’s smartphone metadata-based digital scorecards fares against each of these characteristics.
According to a TransUnion survey, 34% of lenders already use some types of alternative data to evaluate both prime and nonprime borrowers. The use of alternative data is most prominent in credit card, auto loans, and consumer finance, as well as in the FinTech world but there are also signs of early adoption in the mortgage industry. 66% of lenders surveyed reported that they were able to lend to additional borrowers in their current markets and 56% reported access to new markets by using alternative data.
Major credit bureaus (Experian, Equifax, and TransUnion) are already starting to incorporate alternative data within their databases, through acquisitions and/or partnerships. Being a free market, lenders and data sources will surely work towards more widespread use of alternative data—after all, it opens new profit pools for both parties. However, the social benefits of using alternative data may be significant enough to warrant the use of legislation to accelerate the pace of adoption by mandating the reporting of selected alternative data.
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