Lenders find more uses for alternative credit data

Frank Gargano

Banks and credit unions are increasingly using alternative consumer credit data, such as bank account information, to strengthen programs for "second-look financing" and lending into underserved markets.

A recent LexisNexis Risk Solutions survey of roughly 225 senior decision makers for marketing, lending and credit risk in financial institutions across the U.S. found that 65% of respondents use alternative credit data on anywhere from 50% up to almost 100% of all new applicants. As a result, more than half reported revenue increases of 15% and higher.

U.S. Bancorp in Cincinnati is using alternative data to develop a holistic banking platform for small-business clients that organizes all of the customer's accounts and compiles income and asset statements for use in one dashboard. In some cases, an applicant's history as a consumer could fill in gaps in their credit history as a business owner, for example. 

Seshu Guddanti, senior vice president and senior director of software engineering for server message block platforms for the $585 billion-asset bank, explained how applying a platform mindset to aggregate consumer account and performance data can help the bank offer more products and services.

He stressed that the data doesn't limit a customer to being categorized as a small business client, as they "could also be a consumer and could also be a mortgage customer. … So we're taking a platform view that once this data is aggregated, it could be used by many different teams within the bank to make their own decisions about this data," Guddanti said during a panel discussion at the Fintech Meetup conference held in Las Vegas earlier this week.

Alternative data is also helping lenders reach underserved markets. Companies that solely use data from credit agencies can unfairly perpetuate biases toward underserved communities and further the divide between them and lenders, said Kareem Saleh, founder and chief executive of the Los Angeles-based fairness solutions firm FairPlay.

"It turns out that, especially if you're building models on credit bureau data, that the data is kind of overfit to the majority population. …[This] means that there are these subpopulations [of consumers] that are not well represented in the data whose riskiness can be overstated," Saleh said. 

As an alternative to traditional metrics, companies like Ribbit, a data solutions provider based in Oxford, Ohio, are helping financial services firms develop models for lending by analyzing consumer-provided account data and non-credentialed data to build a more comprehensive credit profile.

In the case of firms that engage in second-look financing — which are loans offered to consumers whose credit scores generally fall below 680 and are turned away by larger institutions — the established rating methods are oftentimes not enough by themselves to render a confident decision, said John Gordon, chief operating officer for Ribbit.

"For us, we believe that the [consumer's bank account] offers the clearest window into that consumer's financial health as well as ultimately what they can afford, so that you're creating the best possible relationship" between the financial institution and the consumer, Gordon said.

Many small-business owners just starting out are facing a similar challenge when applying for lines of credit due to relatively incomplete performance profiles with rating agencies such as Equifax and Experian — leaving entrepreneurs with few options for funding and lenders with the question of how to best determine their credit worthiness.

Dave Hoare, chief technology officer and co-founder of the London-based application programming interface firm Codat, explained how lenders integrated into a business client's point of sale system can obtain real-time transaction data to use as an up-to-date resource for assessing the creditworthiness of an applicant.

"They can see sales literally up to the minute, they can see which products are selling well, they can see how sales have gone up over the months, they can see payment information and they just have this sort of closer-to-the-bone view of how the business is operating, rather than purely depending on [outdated] bureau data," Hoare said.