Using alternative data to determine worthy borrowers could have generated $1.7 billion for credit card issuers and $1.9 billion for the auto loans industry last year, a study by Javelin Strategy and Research, and commissioned by LexisNexis, found.
Certain customer segments, such as the underbanked and very young customers under the age of 25, often have little credit history and are difficult to evaluate for credit worthiness, the study, called “Evaluating the Viability of Alternative Credit Decisioning Tools,” noted. Banks have tried to fill the gap by asking for supplemental information from such customers; customers have to get the information requested and this can lead to a drawn-out underwriting process that discourages many customers from seeking credit.
“The study points out that while lending is currently rebounding from an economic recession, traditional measures of credit-worthiness are falling short and consumers are defying pre-recession risk categories,” Mark Luber, LexisNexis’ vice president of data and analytics, said in a statement released today announcing the results.
A number of vendors today already provide alternative credit decisioning tools that help lenders find consumer information that can’t be found in traditional credit reports and can help predict a customer’s ability to repay. Some of the information these products collect can include educational attainment, rent and utilities payments and property assessments, the study said.
A 2007 report by the Center for Financial Services Innovation studied the effect of three different alternative credit decisioning tools on historical records of consumer credit portfolio performances. All three tools successfully helped to identify the most and least risky potential borrowers, the study found.
The study found that consumers are interested in the use of alternative credit decisioning tools because many customers have already grown accustomed to lenders requesting extra information from them beyond their credit report. Banks using vendors to provide such tools need to be transparent with their customers, so that customers aren’t suspicious of dealing with vendors that they may be unfamiliar with.
Javelin also spoke with a number of lenders, who expressed interest in using alternative credit decisioning tools and expected the products would improve their lending portfolios, the report said. Compliance remains a big concern for the lenders however, and the study noted that regulators view alternative credit decisioning tools with a bit of hesitation. Regulators will need “assurance of the fairness and permissibility” of the data collection of these tools, and that may be demonstrated through compliance with the Fair Credit Reporting Act and the Equal Opportunity Act, the study recommended.
Jonathan Camhi has been an associate editor with Bank Systems & Technology since 2012. He previously worked as a freelance journalist in New York City covering politics, health and immigration, and has a master's degree from the City University of New York's Graduate School ... View Full Bio