2020 vision: Alternative data delivers insights into consumer credit behavior
Our latest web seminar discussed best practices and new research on the value of alternative data for gaining insight into consumer credit behavior. This popular session was attended by risk managers and compliance officers across multiple industries, including auto, telecommunications, marketplace lending and banking.
The following are answers to the most-asked questions we received during the presentation regarding the value of alternative data when making lending decisions and its application across industries and credit segments.
Q: Is the main value of alternative data for scoring credit invisible and marginal applicants? Is there value when using alternative data to make lending decisions for prime consumers?
A: Alternative data provides benefits across the credit spectrum from credit invisible and marginal consumers to prime. Enterprises may realize different benefits, depending on their business model and target audience. Here are a few examples that demonstrate the value that can be derived from alternative credit data based on different scenarios.
- How complex is your offer/pricing strategy? Enterprises with highly nuanced product and pricing strategies may derive the most value with near-prime and prime consumers. In this case, extending attractive offers to a population that is more likely to receive multiple offers from competitors could assist in capturing their business. A product and pricing strategy that is straightforward may deliver more value for consumers on the margin. For example, if a lender’s policy is that all customers with a traditional credit score above 650 receive the same offer, alternative data may boost the creditworthiness of applicants falling just outside the lender’s radar.
- Do consumers comparison shop in your market? Automotive lending is one example where consumers may already know what offers they qualify for when they walk in the dealership. Therefore, competitive pricing is important – especially when presenting offers to prime customers who qualify for loans from multiple lenders. ID Analytics receives regular feedback from our auto lenders on the value alternative data adds within the prime segment for pricing, deal structures, and making competitive offers.
- Do you have a high volume of credit invisible applicants? Alternative credit data has become known for its ability to help score credit invisible consumers. Enterprises who see a high percent of young or recent immigrant applicants, such as telecommunication companies, may see the most value from alternative data with credit invisible or thin-file consumers.
Q: What compliance measures does ID Analytics take when developing its alternative data credit scoring models?
A: From a compliance perspective, ID Analytics conducts a rigorous regulatory review of all its scoring models and includes in depth model development and governance documentation that can be shared with prospects and clients during the solution evaluation process. We note that ID Analytics’ credit models are used by top-10 U.S. financial institutions.
ID Analytics has seen the value of alternative data in evaluating the creditworthiness of consumers. We were encouraged by the joint statement issued by five federal financial regulatory agencies on the use of alternative data in underwriting by banks, credit unions and non-bank financial firms in December of 2019. These agencies recognized the benefits of using alternative data in credit underwriting, such as expanding access to credit and enabling consumers to obtain additional products and more favorable pricing and terms.
To learn more about how alternative data can help support your credit risk management strategies tune in to the on-demand version of our recent web seminar hosted by American Banker, 2020 vision: Taking action on the latest trends in alternative data.
ID Analytics is a LexisNexis® Risk Solutions company