In today's credit-conscious and fraud-wary world, credit scores are vital components of consumers' financial strength. But, there is a large segment of Americans who do not qualify for credit. According to information solutions company Experian (Costa Mesa, Calif.) and the Information Policy Institute (IPI; New York), however, alternate forms of data can prove a person's credit worthiness.
The unbanked or underbanked - people who have little, if any, relationship with a financial institution - often are comprised of minorities and immigrant communities that bring with them a different point of view of what constitutes financial services. As a result, they often are unable to build any kind of credit history, which can prevent them from securing credit, such as mortgage loans, according to Laura DeSoto, senior vice president of marketing with Experian. "With the changing demographic and growth of immigrant communities, the traditional form of how consumers move into credit needs to be expanded because of this influx of people from different cultures," she says.
According to a study by Experian and the IPI, 18 million Americans have credit files that are too "thin" to score and another 17 million have no files at all. To address that population, Experian and the IPI examined the idea of using alternative data - information from recurring payments histories, such as data from utilities, cable companies and wireless providers - to help these people gain credit.
"Utilities information looks quite similar to information lenders are using today," DeSoto notes. "You see good payments patterns and delinquencies - that's how credit scoring looks at data." If consumers have been diligent in paying their telephone bills, then that should be used as a measure of their credit worthiness, she asserts. "What's great is we're able to quantify the opportunity and identify the recurring payment patterns that can open up the market."
Much of banks' future, nonmerger-related growth will be derived from the unbanked or underbanked, according to DeSoto. She cites a TowerGroup (Needham, Mass.) figure that says 70 percent of organic growth for U.S. financial services institutions over the next five years will come from the Hispanic market alone - a segment that makes up a good chunk of the underbanked, she notes.
Mitigating the Risk for Banks
Despite such a promising opportunity, however, some banks might feel the use of alternative data in granting credit to people is too risky. According to DeSoto, it is a matter of educating banks. "They're very interested in this market, but they don't feel they have the appropriate risk-assessment tools" for this segment, she says. "How can you develop a profile of a consumer and get a credit score if there's no credit history?" DeSoto adds that many of Experian's banking clients have expressed interest in the idea. "The lenders have told us to put this new capability into their current reporting system," she contends.
Developing new scoring and analytical processes for banks is just one side of the equation, however. The other side concerns the actual data furnishers (e.g., utilities, cable companies, etc.). They, too, will require some technological fine-tuning before they can efficiently transmit customers' payment data to the credit bureaus for scoring. It is a matter of consolidating their payments silos into one central payments system that follows the standard Consumer Data Industry Association format for reporting data, according to DeSoto.