Utilizing Alternative Data for Immediate Lift

Growing your portfolio seems like an obvious objective, but many financial service providers struggle with the fear of the associated risk. But what if there was a way to grow while mitigating the increased risk? Well, here’s the good news, there is. Alternative data empowers lenders and financial service providers with the ability to generate lift by identifying consumers whom they may have not previously approved when using traditional credit decisioning scores and products.

New Opportunities

Alternative data differs from traditional credit data in that it consists of non-tradeline type attributes. For example, instead of reporting on active and inactive credit lines, alternative data may consist of banking and payment history, utility payment history, rental payment history, phone usage, and payment history, etc. While these data sources are not new to the industry, their increased usage and rapid adoption certainly are. Over the last decade, lenders and financial service providers have begun incorporating these types of alternative data solutions into their underwriting models in an effort to level the playing field and provide opportunities to consumers who may have not had financing options previously. While this obviously benefits underserved consumers, this also benefits lenders by providing access to an untapped and underserved market. That being said, why is alternative data so powerful?

Why You Need Bank & Payment Data

One of the key benefits to alternative data is that it can tell a different story about a consumer, or it can help fill the voids left by the traditional bureaus.
Alternative data can tell a fuller story of consumers typically overlooked by traditional credit bureaus, providing valuable insight into those lacking credit history. The credit-invisible borrower is often penalized for lacking information but that does not mean they lack the ability to pay.

Similarly, alternative data can help with financial inclusion and overcoming biases. A recent study by the CFPB revealed that “consumers in majority Black and Hispanic neighborhoods, as well as younger consumers and those with low credit scores, are far more likely to have disputes appear on their credit reports.”1 It is clear that the more layers of data from multiple sources you have on an applicant the more precisely you can determine their creditworthiness.

Using alternative data can more accurately calculate an applicant’s current financial status and the factors that affect their ability to repay a loan. A great example of this would be with banking and payment data. Unlike traditional credit reports and scores, which will mainly assess the credit risk of a consumer based on historical tradeline data; Banking and Payment Data, provided by companies like ValidiFI, assess the overall banking reputation of a consumer, as well as their interactions with merchants spanning all industry types, painting a more realistic picture how consumers behave in their everyday life. It is also less likely to be error prone as it pulls from data directly associated with a consumer. This is done through assessing transaction types, transaction amounts, velocity of transactions, and outcomes of transactions, to predict the outcome of future payments based on the consumer’s history.

Case Study

Now you may be asking yourself, is there really that great of a difference between traditional data and alternative data? Well, the answer is a confident yes, as proven by countless studies. A recent study comes to mind, which compared ValidiFI’s Payment Instrument Risk Score, an alternative credit decisioning service, and a traditional credit score. The study led to many interesting insights, but one that caught the attention of all involved was the correlation or lack thereof between the two data sources. This confirmed our assumptions that alternative data, specifically the Payment Instrument Risk Score, was not only able to accurately predict defaults, but it did so while utilizing unique data. What does this mean for a lender or financial service provider? It means that they can use ValidiFI’s services on its own to make a highly accurate credit decision, or they can be combined with data from traditional sources. The combination works seamlessly as the two data sources complement each other and tell a more complete consumer story.

Like all new things, it is not uncommon for there to be skepticism, or beliefs that it is too good to be true. Fortunately, many alternative data providers, such as ValidiFI, offer comprehensive proof of concept strategies, which consist of retroactive studies, as well as live testing. Contact us today to get started and see how banking and payment data can provide lift instantly to your credit modeling.


If you have any questions about alternative data or if you would like more information on our services, contact us online or call us at (754)-209-2511 today!

1 CFPB Finds Credit Report Disputes Far More Common in Majority Black and Hispanic Neighborhoods https://www.consumerfinance.gov/about-us/newsroom/cfpb-finds-credit-report-disputes-far-more-common-in-majority-black-and-hispanic-neighborhoods/

Tara Kumar