Alternative Data

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Alternative Data: Enhance Your Assessment of Credit Risk to Expand Your Customer Universe In a strained credit and risk environment, credit profiles and risk assessment models that incorporate alternative data create opportunities for credit providers as well as consumers and businesses seeking access to credit.Davina Myburgh, Director: Core Credit at TransUnion

Catch-22: Needing credit to apply for credit
It’s understandable that credit providers are reluctant to extend credit without reasonable assurance that the person (or company) on the other side of the loan can afford to, and will, meet their payment terms. But for millions of “thin-file” customers (those who don’t have a lot of credit data available on file) this presents a tricky problem: you need credit to apply for credit, but you can’t get credit if you’ve never had credit to begin with.

Seems like a bit of catch-22, doesn’t it?
The reality is that many companies rely on what we call traditional data—demographic and contact information, payment information and enquiries history—when assessing credit risk. This means their potential customers need to show they have a history of managing credit well in order to be considered for credit in the first place. If they can’t, the credit provider can take the risk, extend credit, and hope for the best. But more often than not, they err on the side of caution and reject the credit application.
Why traditional credit data isn’t enough anymoreThe problem with this approach is that everyone loses out.
Consumers aren’t able to access credit that will help them improve their lifestyles.
Small businesses can’t get loans to finance growth, employ more people, and ultimately contribute to economic growth.

Credit providers limit themselves to targeting the same, saturated market of customers with a “thick file” of credit history, and miss out on a significant and potentially profitable segment of individuals and businesses seeking credit. Where alternative data comes in ...All lenders must comply with the National Credit Act, which means using traditional credit data when conducting an affordability analysis. But by adding alternative data to the mix, they have a better-informed view of potential risk than that given by a standard affordability check

Alternative data comes from a wide variety of sources to enhance what we know about a credit applicant. Credit assessments that include alternative data will provide information on anything from an applicant’s occupation, properties and business dealings to the relative risk associated with their cell phone use.

This information provides valuable insight for predicting credit and financial behaviour. For example, we know there’s a strong correlation between the way we conduct our business and personal accounts. So, using alternative data and analytics that link the two can contribute to a favourable credit assessment—assuming the accounts are run well, of course!... and why it’s a good thingThis is good news for credit providers, consumers and small businesses. Credit providers can expand their customer universe and achieve growth in a strained credit and risk environment. With the insights provided by models that use alternative data, they can assess and acquire customers they may have overlooked in the past simply because there was insufficient credit information available to help them make an informed decision.

In Canada, for example, TransUnion built a model that incorporated alternative data and enabled an additional 2 million consumers to be scored for credit. In Colombia, which like South Africa is classified as a developing market and therefore has a large proportion of thin-file consumers, this number was 5.9 million.

Consumers who are new to credit, or have a credit-free lifestyle, have a fair chance of gaining access to credit when they need it, as credit providers can more accurately assess their risk and provide loans on the right terms by considering more than their credit history only. The same can be said for businesses that don’t yet have a history of managing credit. Alternative data models can help them get access to credit in a way that facilitates, rather than stifles, their growth.

Alternative data enhances the value of traditional data and provides a comprehensive view of any potential customer, regardless of their credit history. It enables credit providers to make more accurate assessments of risk, expand their customer universe and onboard suitable customers they may previously have overlooked. This in turn contributes to greater financial inclusion, small business development and, ultimately, economic growth—which is what Information for Good is all about.

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