Lenders Embrace Alternative Data to Combat Fraud and Reach Borrowers
As federal funding for statistical programs diminishes, banks and financial technology (FinTech) companies are increasingly turning to alternative data to guide their credit decisions. This shift is reshaping the credit landscape, offering insights that traditional credit bureau files cannot provide. According to Kyle Becker, Chief Financial and Risk Officer at Concora Credit, utilizing alternative data allows lenders to maintain or reduce risk while broadening access to credit for consumers.
Transforming Credit Assessment
The credit assessment process is experiencing a significant transformation. Old models are being rigorously tested, and new sources of intelligence, such as cash flow underwriting, are becoming central to decision-making. Becker emphasized the importance of this shift, stating, “Alternative data is super useful because it allows you to maintain or reduce risk while also providing access to credit to more people.” This approach is particularly beneficial for individuals with “thin” credit files, meaning they have limited histories with loans or credit cards.
Alternative data paints a more comprehensive picture of applicants who may otherwise be overlooked. For instance, cash flow underwriting involves consumers logging into their primary checking accounts to verify income and expenses. This process not only assesses a borrower’s ability to repay but also serves as a defense against fraud. Becker noted, “If we talk about cash flow underwriting, you’ll get to see some information about real-time ability to pay bills. And that’s very, very useful on top of credit history, especially if it’s a thinner credit history.” This dual benefit creates a scenario where lenders can reduce their risk exposure while extending credit to a broader range of borrowers.
Navigating Data Challenges
Despite the promise of alternative data, not all stakeholders are adopting these new strategies uniformly. One challenge is the variability in data quality. Becker pointed out that model degradation is a persistent issue, which Concora Credit actively addresses through data science. The organization monitors its models to identify when predictive power declines and establishes optimal schedules for model rebuilding.
“Having digital expertise, strong data science, and scale are all things that have made it so we can really take a lot of advantage of these alternative data sets,” Becker explained. Concora Credit evaluates around a dozen new data sources annually, underscoring the necessity of integrating and validating data effectively.
Integrating alternative data sources is not a straightforward process. Some datasets are more beneficial early in the customer lifecycle, while others are advantageous later on. Financial institutions face the challenge of balancing these considerations with cost structures that work at scale. Becker noted that while underwriting and fraud prevention represent low-hanging fruit, the broader potential of alternative data spans the entire customer lifecycle.
“I’m a big believer that data science can help you everywhere,” he stated. Enhancing customer service through data insights can lead to improved client satisfaction, as understanding customer needs can streamline communication and problem resolution.
Becker envisions a layered approach to credit assessment, where traditional credit bureau data serves as a foundation, complemented by alternative data sources. He stated, “We often find one or two new data sources per year that we add, and we just keep layering that into this stack in our underwriting and fraud defenses.” This ongoing enhancement enables lenders to extend credit access to those who typically lack it.
“The credit bureau data will always matter,” Becker emphasized. “It will always be important. But I think alternative data is going to play a big role.” As the financial landscape evolves, the integration of alternative data is set to redefine how lenders approach credit assessments, ultimately benefiting both institutions and borrowers alike.
