FIs are warming up to alternative data and 93% think it will have a positive impact on their bottom lines

While the adoption of alternative data in lending is far from widespread, a new study has found that lenders are gradually moving to incorporate these data sources in their lending decisions. . For lenders, alternative data presents an opportunity in the face of rising concerns around the efficacy of credit scores as a good depictor of credit worthiness. For example, in 2017 the CFPB found that alternative data from unconventional sources may help consumers who are stuck outside the system build a credit history to access mainstream credit sources. Others have stated that credit scores leave out whole segments of potential consumers like young adults or those who rely more on cash.

Take up of alternative data by traditional FIs have been slow, while fintechs like TomoCredit have captured some of this market by building products that underwrite based on cash flow.

But recent data shows that FIs are warming up to the possibilities alternative data presents, albeit slowly. 31% of FIs now believe that credit scores are not a sufficient indicator of credit worthiness compared to last year where only 17% believed the same, according to a recent study by Novacredit.

Currently 43% of FIs use alternative data to gain a better understanding of their consumers’ finances. And among the types of alternative data they utilize, income verification and employment verification are the most commonly used data points.

Although research in the past has found that  consumers who had their rent data reported noticed a 60 point jump in their credit score, less than half of FIs report using rent payments data in their lending depicter. Previous research also reports that younger consumers (18-25) stand to benefit the most from the use of this kind of data.

If FIs can better determine who is a good credit risk, it’s good for consumers as well as lenders’ own bottom lines.