Alternative Data: Who has it? Who wants it?

Big data has evolved to become an important concept in our modern world. Decades ago businesses could only collect the basic information needed on consumers to obtain a mortgage, which primarily consisted of a credit score, household size, and income. In today’s world, the number of available data businesses can gain access to about consumers is staggering. While this concept may sound frightening, the reality is when businesses know more about consumers, this can be very beneficial to everyone, especially when it comes to lending. Alternative data can help consumers gain more access to credit because lenders no longer need to solely rely on traditional credit reports.

Demand for Alternative Data is Rapidly Growing

Companies, such as Microbilt, the parent company of PRBC, have been collecting alternative data for their clients for over 40 years. Fast forward several decades and the demand for alternative data is growing at a rapid rate, with the surge of marketplace lending over the past few years being a primary driver of this growth. To date, alternative data has become appealing because companies are looking for the fastest and easiest way to get reliable information about potential employees, clients, and borrowers. Big data companies are rapidly providing banks, marketplace lenders, and other companies with the essential information they need to make decisions.

How Alternative Lenders are Using Alternative Data

Unlike traditional lenders that use standard credit reports to assess potential risk, more and more marketplace lenders are turning to alternative data in order to find and weed through loan applications in a very timely manner. The connection between online lending and alternative data is so strong and obvious that it is no wonder that several companies now are turning to use it for decisioning in recent years.

Lending marketers want to connect with as many consumers as possible. Being almost 1 in 5 Americans have no credit score, and an estimated 11% of the U.S. adult population has no credit history with 8.3% of adults having an insufficient history to even generate a score (statistics courtesy of Motley Fool). As the Financial Brand notes, "...many consumers have little or even no traditional credit data on file for evaluation, which makes the conversation short." In this respect, alternative lending is a huge gamechanger.

According to a 2018 report issued by the Philadelphia Federal Reserve, a significant number of consumers in the “subprime” category pool of applicants who are judged by traditional measures may not be eligible for loans. However, when factoring in alternative credit data that is contained within big data, this often shows this group of borrowers are not risky at all, yet they were still subjected to “excessive risk premiums that reflect their low credit scores (based on inaccurate measures).”

As time moves forward, more and more mainstream lenders will be examining alternative data and integrating it into their application processes with the intention to make loans available to a broader group of borrowers.

Big Data or Big Brother?

Companies that collect alternative data also look at sales records, employee history, and buying habits. Essentially, they take qualitative data and turn it into quantitative data, taking all pieces of information into account when they assess risk. Many people see this as a pro to alternative data. More information means better-informed decisions. But some analysts are starting to wonder how much information is too much information?

Banks typically only look at numbers, but alternative data collection companies are also to easily see age, race, religion, amongst other factors. Marketplace lending lacks the regulations placed on banks; again, this can be seen as a negative or a positive depending on the situation and the outcome. Today, alternative lenders are using alternative data to better evaluate borrowers and their ability to repay their loans or make timely payments. 

While there are some worrisome aspects to using alternative data, numerous companies have been very successful in their use of it. A report by the Center for Financial Services Innovation states, “Combining massive data sets thoughtfully can lead to greater accuracy and granularity.” The report goes on to say financially underserved consumers can benefit from data technology tools because it enables providers to tailor their services to help both lenders and borrowers reach success.  

PRBC is committed to helping consumers with low or no credit scores build an alternative credit score to help them demonstrate their creditworthiness to lenders. Our alternative scoring method works by scoring you based on your ability to pay your regular bills, such as utilities and rent. To learn more about our services and how we can help you build a viable alternative credit score, contact us today.