Financial institutions, including credit bureaus and online lenders, are looking at alternative data sources as another way to create a more holistic picture of a consumer for credit and lending decisioning purposes – and for a more accurate representation overall.
Alternative data in the form of payment history is poised to have a monumental impact on credit and lending for consumers and businesses alike, but it is a system that has remain unchanged for 15 years since Congress enacted a reform of the consumer reporting system, which is alarming, especially given the proliferation of consumer data in the past decade. It’s no secret that there are numerous shortcomings of the credit system—security, lack of consumer control of their data and financial inclusion. The time for a change to the credit system is now and innovative companies are stepping in to make an impact.
Change is in the Air: The Memorandum
In February, the Committee on Financial Services held a pivotal hearing entitled, “Who’s Keeping Score? Holding Credit Bureaus Accountable and Repairing a Broken System,” where executives from the three major credit bureaus—Equifax, TransUnion and Experian—gathered to address the shortcomings and correct deficiencies to empower consumers to have more control over their data.
The importance of data privacy and management in credit and lending is well-known following the wake of high-profile data breaches. Both the memorandum and Committee hearing addressed important concerns, such as accountability for data protection and the confusion the general public has toward credit scores. Furthermore, reports often have “incomplete or erroneous information,” and consumers felt it was too burdensome to attempt to fix these errors.
Today, credit bureaus act like a database with multiple attributes and information. The issue with that is, if these databases aren’t kept up-to-date, the information can be stale, incomplete, or worse—incorrect. This has real, and potentially negative, implications for consumers who rely on their credit report and score to get a loan, buy a house or a car. These databases are also prone to hacking and data breaches, making sensitive and important personal information extremely vulnerable.
Huge Opportunity to Drive Financial Inclusion
The FDIC estimates the underbanked population in the U.S. to be about 50 million adults, due to the lack of a traditional credit score. The opportunity for lenders to drive financial inclusion among consumers and businesses is tremendous – if the right changes are made across credit decisioning processes. Alternative data shows great potential to help do this without negatively impacting default rates.
Consumers have expressed concern that current credit reports are incomplete representations of their financial health and credit-worthiness. Alternative data, such as utility and telecom payment history, provides a reliable way to expand the data inputs that inform credit scores, driving a more comprehensive view of credit-worthiness. Most consumers have utility or telecom payment data available to enhance the visibility into their credit files, but this information is rarely and inconsistently reported to credit bureaus.
Mainstream credit scores like the FICO Score and VantageScore are now incorporating limited utility and telecom data in core credit files at the major credit bureaus. According to a FICO study on incorporating alternative data, more than one-third of newly scoreable consumers would have scores of 620 or above – pushing them over the threshold to gain access to credit.
The problem is, phone, internet and utility companies do not report this information to the credit bureaus, and recently announced programs to incorporate payment data from banking account information leaves lenders at risk due to the lack of visibility to payments being paid on time and in full.
This is a powerful reality that the current system hasn’t addressed, thereby leaving millions underbanked. However, there are emerging fintech companies empowering the industry with aggregated utility and payment data at scale for creditors and lenders to attribute better credit scores for consumers. And as a result, financial institutions can see an increase in revenue and previously underbanked consumers can gain access to credit from sharing utility payment history.
Consumer Willingness to Share Utility Data
Due to previous high-profile data breaches, consumers are justifiably concerned about how their data is shared and secured. Despite this, they are willing to share utility and telecom data as part of the loan application process to boost their approval chances. A PERC study found that incorporating utility and telecom payment data into scoring models results in a more than five percent lift in approval rates, which consumers and lenders both can benefit from.
Furthermore, a recent Urjanet study found that 59% of consumers would be willing to share their utility and telecom payment history with a lender as part of the loan application process. This number jumps up to 66% of consumers willing to do so when the consumer has previously been denied credit.
Not surprisingly, consumers prefer to provide consent for the utility or telecom company to share this information directly from the utility instead of manual processes collecting past bills themselves. This also benefits lenders given their preference to receive data from authenticated sources, minimizing the risk of document fraud.
As the industry looks at how to do this, relative to the issues of data privacy and management, a user-permissioned model puts control back in the hands of the consumer, while enabling a new category of data furnishers at scale.