The Future of Credit? Traditional Credit Data Meets Alternative Credit Data

Alternative data is driving heated discussion in fintech, credit, and financial spaces. Why?

It could be the next frontier for consumer financial data. Traditional credit data has been, and continues to be, the driving force behind credit data-driven processes, flows, and decisioning. It has significant coverage and a long history of utilization. Yet, there’s an increasing segment of consumers that are not well represented by traditional credit data. Where traditional credit leaves off, alternative data picks up. There are benefits and challenges to both and companies are learning how to expand their models with broader data sets.

At Fintech Nexus 2023, CRS and Nova Credit CEOs, Stephen Hawkins and Misha Esipov, took the stage to highlight the importance of alternative credit data – also referred to as consumer permission data – in enhancing credit assessment and encouraging fair and informed lending decisions. They dig into the challenges associated with implementing this growing dataset and offer solutions to make it more accessible and beneficial for fintechs, lenders, and financial industry leaders. There’s a world of opportunity to explore.

Traditional Credit Data

200 million.

The number of consumers represented in the traditional credit system. This is the power behind traditional credit data from the credit bureaus – Equifax, Experian, TransUnion. The bureaus have been collecting and providing data for six decades or more.

“You have 200 million consumers for which data is parsed out, studied, researched, analyzed, and used in an incredible amount of arenas. You’ve got large institutions like Freddie Mac and Fannie Mae, who have diced and sliced that data to such an extent that they can have a really powerful way to predict those models using that data.”

Traditional credit data is valued for its extensive history and analysis, making it a powerful tool for risk assessment. However, it’s worth noting that consumer permission data offers new insights and can complement traditional credit data to provide, at times, a more complete picture of a person’s financial situation.

Limitations of Traditional Credit

Traditional credit data for consumers primarily focuses on credit card usage, loan repayments, and mortgage history. Though this covers a lot of ground, it can also limit insights into overall financial behavior, particularly if they have a thin credit file or no credit history at all.

Exclusion of certain populations

Traditional credit data may not adequately capture the creditworthiness of individuals who are new to the credit system, such as young adults or recent immigrants. This exclusion can make it difficult for them to access credit or receive favorable terms.

Insufficient representation of financial responsibility

Traditional credit data does not consider various indicators of financial responsibility, such as utility and telecommunications payments or rental history. As a result, individuals who consistently meet these obligations may not receive proper recognition for their positive financial behavior.

Inability to assess income and cash flow

Traditional credit data does not provide explicit information about an individual’s income or cash flow. Lenders often rely on self-reported income during the application process, which may not always be accurate or verifiable. This limitation can impact the lender’s ability to assess the borrower’s repayment capacity accurately. Cue: open banking data. Something that Nova Credit has made a big bet on in recent years, CEO Misha Esipov noted at Fintech Nexus. Their Cash Atlas™ product makes “open banking data easy-to-use for purposes of credit risk assessment.”

Limited response to changing circumstances

Traditional credit data may not reflect recent changes in an individual’s financial situation. For example, it may not account for a sudden loss of employment or significant income fluctuations. This can hinder the lender’s ability to make up-to-date and relevant credit decisions.

In light of these limitations, credit reporting agencies, credit bureaus, lenders, and other financial organizations have started to explore alternative credit data to provide a more comprehensive view of creditworthiness. Alternative credit data helps address some of the gaps and limitations associated with traditional credit data, enabling an expanded assessment of creditworthiness for a broader population. Cutting-edge organizations are actually already incorporating it into their flows.

Alternative Credit Data

Alternative credit data refers to non-traditional sources of information used by lenders and credit bureaus to assess the creditworthiness of individuals who have limited or no credit history. Traditional credit data primarily relies on information such as credit card usage, loan repayments, and mortgage history. However, alternative credit data helps to supplement or provide an alternative to this traditional data by considering additional factors that can provide insights into a person’s financial behavior and repayment capabilities.

Alternative credit data can include a wide range of information, such as:

Utility and telecommunications payments

Payment history for utilities like electricity, water, gas, and telecommunications services (phone, internet, cable) can be used to assess creditworthiness.

Rental payment history

Information on rental payments, typically obtained from property management companies or rental platforms, can provide insights into an individual’s reliability in meeting their financial obligations.

Bank account activity

Analysis of bank account transactions and balances can provide an understanding of an individual’s cash flow and financial management habits.

Employment history

Consistency and length of employment can be indicative of stability and a borrower’s ability to generate income.

Education and professional certifications

Certain lenders may consider an individual’s educational background or professional certifications as factors to evaluate creditworthiness.

Public records

Public records, such as bankruptcies, tax liens, and civil judgments, can be taken into account to assess an individual’s financial risk. 

CRS partners with LexisNexis and other vendors to deliver easy-to-use, customizable public records data. Talk to our credit experts to learn more about adding alternative data to your mix.

Advantages of Alternative Credit

The primary benefit of utilizing consumer permission data is expanding the population – to young adults or immigrants, for example – that can be qualified and approved for credit and potentially offering better rates. It helps expand access to credit for those who may not have traditional credit profiles, enabling them to build credit and access financial services. In fact, Nova Credit notes that they helped improve American Express’s approval rate for the “new to country” segment by 500%.

Challenges of Alternative Credit

This is no easy task. While traditional credit has a long history of usage and analysis, alternative credit can be more of a wild, wild West. An expansive list of data sources and data formats can complicate things. Implementing consumer permission data requires expertise in user experience, digital workflows, credit risk analytics, and compliance with fair lending laws.

“To be able to tap into a tremendous amount of data that sits outside the traditional credit reporting space, you have to understand how to interact with user experience. You have to understand how to think about the tradeoff between a digital workflow and credit risk analytics.” – Misha Esipov, Nova Credit

Will Alternative Credit Data Replace Traditional Credit?

This is where it gets juicy, and experts have differing opinions.

“I don’t think it’ll ever replace it. I think it’ll balance it out, because you will still have those 200 million consumers, who have a deep file of traditional data. But I do not think that we’re going to be able to do financing the way we’re doing now with just traditional data. It will have to be balanced out with banking data.” – Stephen Hawkins, CRS

“Yes. Look, what is bureau data? What is traditional data? It is a summary of your liabilities and how well you repay those liabilities, right? And, your activity in applying for credit, that’s traditional bureau data. You can argue there’s other stuff in there, but at the core, that’s what it is. What is open banking data? What are some of these alternative data sources? It’s a deeper view into your financial health, right? I can see you’ve got a direct deposit coming in from [your employer] every couple weeks. I can see rental, expense profile, cash balance, information into your liabilities.” – Misha Esipov, Nova Credit

Using Traditional Credit Data & Alternative Data Together

No doubt about it, there is a vast amount of valuable data outside the traditional credit reporting system. Most importantly, leveraging it means obtaining permission from consumers to access these data sources, which can provide a more comprehensive understanding of their financial health and creditworthiness. It can expand models and pipelines. With more information, companies can actually lower their credit score thresholds and still be confident in reaching qualified candidates.

Credit bureaus have already started to incorporate some alternative data into their datasets. Experian Boost is a good example, which utilizes consumer permission and bank data. Ask CRS for more info on this and similar products!

Overall, using alternative data sources is still in its infancy. But, CRS has a method to the madness.