Why Leverage Alternative Data vs. the traditional FICO score

At some point in our lives, we will all have to apply for a financial services product that requires a look at our credit history, a loan, a mortgage or even renting a new apartment, for all of these things, a credit history report is required. For most people, this is no problem, for a percentage of the population, however, this can prove tricky as they do not have access to that precious credit history. People such as new immigrants who have yet to get their first credit card, the underbanked and unbanked population, and those who have a light credit history because they are just beginning down the journey of building one. Previously this was a massive challenge for these individuals, but now, with the use of alternative data, the problem is being solved.

Alternative Data is financial data that usually isn’t collected by credit reporting agencies or typically provided when customers are seeking financial products such as a loan. In this essence, alternative data is a variety of sources including bank account cash flow analysis, usage of credit cards and other financial touch points such as rent or utility bills. This data also contains non-financial health checks such as education and employment records and can even include an individual’s social media accounts. Financial institutions (FI’s) in turn can look at this alternative data to prove the good history and reliability of an individual, for example, paying rent and bills on time can demonstrate a good track record, or having a job shows an individual has a reliable income.

As an FI, leveraging alternative data can be an excellent way to get new customers into mainstream banking solutions and to partner with FinTechs who are already leveraging this data to help with their customer growth. Many FinTechs are using APIs and AI capabilities to gauge a customer’s risk potential, creditworthiness and to determine what financial products are the best fit for that specific individual. This can prove especially helpful as it opens a new pool of potential customers to connect with instead of peppering existing customers with financial products that they don’t want or require.

While alternative data probably won’t replace the traditional FICO credit score, it is a step towards building a lending and credit ecosystem that embraces a higher percentage of the population. As our financial system evolves, alternative data will become another tool that FI’s and startups can leverage to determine credit history and the right financial products for consumers.