Member Exclusive

Lending Briefing: Lenders are adopting alternative data, but find it challenging

  • An increasing number of lenders have started to incorporate alternative data sources into their risk modeling, but many find this initiative challenging.
  • Data reliability and the costs associated with alternative data sources represent the top barriers for lenders to start using alternative data.
close

Email a Friend

Lending Briefing: Lenders are adopting alternative data, but find it challenging

Over the past few years, lenders have increasingly turned to alternative data sources — such as income verification, payday loans, bank transaction data, and cash flow underwriting — in order to gain a clearer picture of a consumer’s true creditworthiness beyond credit reports. 

Traditional data is a relic of past underwriting methodologies, and lenders know this. The vast majority believe that traditional lending data doesn't give them a complete picture of a consumer's creditworthiness, a new report by Nova Credit found. 

Nowadays, an increasing number of lenders have started to incorporate alternative data sources into their risk modeling, as they provide valuable insights into a consumer's trustworthiness in paying important expenses. 

What lenders look for are solid indicators of risk in order to assess if the consumer will pay back the loan. Alternative data is a perfect candidate for this, but there are still many knowledge gaps to fill in terms of how to make the most use of this data. 

When asked about their perception of where the industry is today, half of the lenders surveyed said they are ready to adopt alternative consumer data into their credit risk assessments and nearly 40% are in the early stages of adoption.

However, not everyone is on board with using alternative data today. The vast majority (83%) of those who aren't ready to incorporate alternative data sources into their credit risk assessment said they would change their mind if the industry could better validate its impact of predictability. 

Data reliability and the costs associated with alternative data sources represent the top barriers for lenders to start using alternative data. 

This is likely a sign of this market segment's maturity, which is still in its early stages of adoption. 

The use of different types of alternative data is still quite recent. Around 50% of lenders have only started looking into cash flow and bank transaction data over the past one or two years, and a third began 3-5 years ago.

Adoption is driven mostly by midsized lenders (those with 500-1000 employees), which were found to have a stronger focus on innovation and expansion through the use of alternative data, much more than larger organizations (1000+ employees) – 80% versus 39%. 

And even for those that have gotten on the alternative train, similar challenges surface. The cost of data is a deterrent, as well as understanding how to incorporate that data into existing frameworks. 

The study also noted how lenders are not fully taking advantage of alternative data to reach new market segments that would be traditionally hard to underwrite. Only 27% of lenders said they were motivated by a desire to reach new audiences through the adoption of alternative data. 

This contrasts the fact that lenders consider the expansion to new geographic markets as their greatest strategic initiative for their company. Lenders know there is untapped potential in many customer segments, and they could benefit from having more visibility into alternative financial data points. 

Quote of the week 

"Lending is a learning business. Sustainably successful lending requires striking the right balance between the amount of money lent and the level of assurance that the customer is required to provide."

- Alex Johnson, Fintech Takes Newsletter

What we’re reading 

Digital lending platform Lendsmart goes live at First Community Bank and Trust

SBA wants to add fintechs to its biggest lending program

What fintech forgets about consumer lending 

Buy now, pay later delinquencies could get 'dangerously' high. What will companies do about it?

Fintech could soon get a bigger piece of government-backed loans

Chart of the week 

Source: CB Insights

What we're writing

How Wells Fargo and Google Cloud AI are scaling up the bank’s digital offering with ‘Fargo’

Wells Fargo is launching a new virtual assistant named "Fargo", powered by Google Cloud AI, to keep up with the digital transformation trend driving evolution of financial services.

Embracing ‘side bank’ status: 5 questions with Aaron Wollner, CMO of Quontic

In this Q&A, CMO Aaron Wollner talks about what’s new in the digital bank’s campaign work and how it’s been shifting its messaging to fit the current financial climate.

Data Snack: Only 41% of consumers are satisfied with their financial services messaging

New research shows that 17% of financial services brands use only one communication channel, and only 28% deliver unified campaigns across all channels.

0 comments on “Lending Briefing: Lenders are adopting alternative data, but find it challenging”

10-Q, Member Exclusive

Bank stocks fell like a stone last week, but ended higher ahead of the Fed — what comes next?

  • Two more banks, Credit Suisse and First Republic, faced a crisis in the past week. Where does that leave banks (big and small) now?
  • Block stock fell on a Hindenburg Research short-seller report alleging numerous claims against the company. The report claims that Block has allegedly inflated its user metrics and facilitated fraud.
Sara Khairi | March 27, 2023
10-Q, Member Exclusive

Can MoneyLion gain ground in the long term on the strength of its underlying businesses?

  • MoneyLion's Q4 2022 results show a profitable December -- however, the firm saw net losses for the quarter and year.
  • Oportun reported its fourth quarter 2022 results on Monday. In the revenue line, the company reported $261.9 million, missing estimates by $1.1 million.
Sara Khairi | March 20, 2023
10-Q, Member Exclusive

Is Dave a ‘fintech survivor’ after all?

  • Dave's Q4 2022 results show that this might just be the end of a rocky road for the neobank -- meanwhile, it is bracing for 2023 head-on.
  • Apple's shares regained momentum last week following Goldman Sachs analysts' optimistic outlook -- based on the firm's new product innovation and margin expansion driven by services.
Sara Khairi | March 13, 2023
Member Exclusive

Tearsheet Pro Live #1: ChatGPT, fact and fiction: What FIs should know about the future

  • In this first Tearsheet Pro Live session, editor Zack Miller interviews a Stanford professor and a machine learning scientist about generative AI.
  • Dev Patnaik and Moses Guttmann share their perspectives on the future impact of technology like ChatGPT on financial services.
Zachary Miller | March 09, 2023
10-Q, Member Exclusive

Less focus on Bitcoin and more Cash App inflows — a sound strategy for Block?

  • A week ago, Block reported its Q4'22 results with earnings missing expectations but surpassing gross profit from a year ago.
  • The surge in the stock is owing to the firm’s strong gross profit growth, which was up 40% in Q4 2022 compared to the prior year.
Sara Khairi | March 07, 2023
More Articles