For a long time the fundamentals of credit analysis have remained largely unchanged, but an overhaul might soon be in order, writes Beth Mattson-Teig for Independent Banker. The need for alternative data sets is clear as large swaths of the population are “credit invisible,” meaning they do not have the credit history necessary to even obtain a credit score.
The basic five Cs of credit are character, capacity, capital, collateral, and conditions. Though gleaning information in these areas in order to build a credit score has been successful historically, the prevalence of alternative data today requires a new look at how scores are calculated. Data such as rent payments or utility and cellphone bills are not integrated into credit scores, but are certainly pertinent information. Mobile payment options, such as Google Wallet and Apple Pay, are making clearer the need for a shift to alternative data.
While big lenders most often depends upon FICO and VantageScore credit scores, many smaller institutions are working to develop alternative scoring methods in order to qualify credit-invisible customers. For example, bank records showing that a customer deposits a paycheck every Friday like clockwork, or a good reference from a landlord, provide positive insight into a customer’s behavior, lifestyle, and ability to pay. The key with an alternative data policy is to ensure that any alternative data tools are fully vetted.
The digitization of banking and growing technological solutions are helping banks to gain access to a much wider variety of financial data—so isn’t it time to put this information to good use?
For more information, see that article in full at Independent Banker.