LexisNexis Risk Solutions unveiled the findings of its Alternative Credit Data Impact Report, a nationwide [U.S.] survey “assessing the adoption, utilization and impact of alternative credit data for credit portfolio growth and management in consumer and small/mid-sized business (SMB) lending.”
The report surveyed those who identify “as senior decision makers for marketing, lending and credit risk in U.S. financial institutions such as banks, credit unions, non-bank lenders and fintechs.”
Alternative credit data “encompasses a broad range of credit risk insights.”
These insights are typically “not included in traditional credit reports and scores including life event insights such as professional licenses and asset ownership and modern credit seeking behaviors from markets like online lending and short-term lending, rental data, consented data and more.” When paired with the traditional credit behaviors currently used in conventional credit scores, these non-traditional credit insights “deliver a more comprehensive view into a consumer’s creditworthiness.”
At least two-thirds of financial institutions surveyed “use alternative data in their credit risk assessments for underwriting and portfolio management.” Eighty-four percent (84%) of respondents “use alternative credit data in prescreening and credit risk across the customer lifecycle, with credit unions taking the lead in using alternative credit data (91%).”
Other Key Findings from the Alternative Credit Data Impact Report:
- Adoption of Alternative Credit Data: Alternative credit data usage is becoming more common as financial institutions adopt financial inclusion initiatives. Of the 37% of self-identified leading adopters of alternative credit data, 55% named financial inclusion as their top objective, followed by improving segmentation (37%) and improving the ability to swap in/swap out applicants (24%). Financial institutions are most likely to use alternative data in their credit risk assessment of deep subprime, subprime and near-prime consumers. Leaders of alternative data adoption are also particularly likely to use it when assessing the credit risk of prime consumers.
- Data As a Business Driver: Business drivers for alternative data use include improving pricing strategies, increasing financial inclusion, risk mitigation and gaining a competitive advantage. Nearly all financial institutions surveyed indicated that alternative data has increased revenue growth by at least 15% and improved customer experience. The report indicated that lack of alternative data usage could lead to lost opportunity, customer friction and limited risk mitigation.
- Financial Institutions Satisfied Yet Challenged: There is overall satisfaction with alternative data, though there are challenges and barriers associated with utilizing alternative credit data for credit risk assessment. Larger tier 1 banks are significantly more likely than smaller banks to be very satisfied with their data, as a result of having more resources to invest in to obtain alternative types of data.
Kevin King, vice president, credit risk and marketing strategy, LexisNexis Risk Solutions, said:
“The high rate of alternative data adoption across the customer lifecycle reflects how lenders of all sizes are increasingly unsatisfied relying solely on the status quo of traditional credit data to grow and manage their businesses. The vast majority of institutions are now using alternative data to assess the creditworthiness of subprime consumers and those with limited credit history, while forward-thinking organizations are achieving significant advantages applying these insights in near-prime and prime segments. This benefits not only the financial institution but the customer experience, helping to ensure lenders present the most appropriate offers to consumers or SMBs, particularly those who might not appear qualified through the lens of traditional data alone.”