The Better Way to Score: Alternative Data

Clearly an alternative data fountain. Credit: Marcus Spiske

Hear (read?) me out.

Alternative personal data can give a holistic view of a consumer that’s far more accurate than credit score. You might know the concept isn’t new. Many already use alternative data to evaluate credit risk — including Experian, TransUnion, and FICO. While this data is often used to only paint a more complete picture around a traditional score, TransUnion has a complete alternative data-only score.

It levels the playing field, in a way. Allowing those with “thin credit files” to build their rep.

So let’s cram the basics.

What is alternative data?

• Complete payment history
• Rental payments
• Mobile phone payments
• Asset ownership
• Full-file public records
• More.

You get the idea. There’s a wide berth. But you’re multifaceted, so shouldn’t the data be?

Who benefits from its use?

• Lenders & credit bureaus
• Younger consumers
• Recent immigrants
• Lower-income individuals
• More.

58% of consumers say that being able to contribute payment history to their credit file makes them feel empowered. There are (not quite) countless use cases where alternative data can prove useful.

So much data

Use Case #1

Lenders and credit bureaus are better able to evaluate a consumer — enabling lenders to expand their customer base while making more informed decisions. This could potentially reduce the number of non-performing loans.

Use Case #2

You’re a young whippersnapper who avoided getting a credit card because “being in debt is bad” and now, you want to get your own apartment. Alas, you discover you are stuck due to lack of a credit score. But you’ll be stuck no more if you’re able to use your alternative data to prove your creditworthiness.

Use Case #3

You’ve just immigrated and need to get your life sorted, but have no applicable credit score to use. Fear not. Alternative data can help.

A good example of a company with this use case is Branch, a lending company that offers small loans in Kenya, Nigeria, Tanzania, India, and Mexico. They use smartphone data to effectively evaluate applicants. This data falls under the category of “consumer-permission data” and spans handset details, SMS logs, GPS data, repayment history, and contact lists. As of April 2019, the company had 3 million customers, had issued over 15 million loans, and partnered with Visa.

Clearly a new world of alternative data

Which major companies are using alternative data?

• TransUnion
• Experian
• FICO
• More, more, more.

According to Experian, 65% of lenders are openly using alternative data beyond traditional credit reports to make decisions. It’s highly likely that there’s a significant percentage of lenders who are not so open about their use of alternative data.

So tell me why I should care in 3 words?

Accuracy, speed, privacy.

Accuracy. We’ve covered this.

Speed. Wide-scale use of real-time data could be a mega game changer. Info including real-time payment data (Venmo, anyone?) could be used for dynamic evaluation.

Privacy. A lot of the alternative data required to get an authentic picture of you requires your consent to be shared. This puts you in control.

Better score. Better world.

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