Credit invisibles in the US are finally on their way to financial inclusion. JPMorgan, Chase, Wells Fargo, U.S. Bank, and seven other banks launched a pilot program where they assessed the creditworthiness of individuals based on alternative sources of data. By looking at their banking histories―such as checking and savings account balances, returned checks, and overdraft usage―the 10 banks included in the pilot program are able to grant credit to those who need it.

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With the program set, 45 million Americans who lack a credit record have access to more financial products and services. On the other hand, this new credit scoring model is instrumental to banks and other financial institutions looking to expand or improve their offerings.

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With the rise of alternative scoring, it is now viable to carry out a more complete and updated credit analysis on clients and potential clients through behaviour prediction. Alternative data makes it possible to anticipate movements and obtain more accurate patterns of an applicant's willingness to pay. In this way, banks and financial institutions can secure a reduction in the risk of credit default, strengthening algorithms that previously were solely based on traditional data.

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As more and more people seek credit to make necessary large-scale investments, alternative data will play a big role in generating credit scores and growing the financial technology or fintech sector as a whole.

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What it means to credit invisibles

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Historically, applying for credit has been difficult to achieve, even more so for people who have little to no opportunities to build their credit scores. These people typically consist of young adults who have yet to build their credit history, immigrants who can’t transfer their credit reports from their previous home country, and people of colour who are disadvantaged by racial inequality in accessing financial services.

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These individuals cannot purchase productive assets such as a car or a house or build their wealth with their resources. Thus, access to credit plays an important role in strengthening financial power. However, the downside of the traditional credit scoring system is that it provides little to no opportunities for credit invisibles to prove themselves. Research shows that a vast majority of Latin Americans and African Americans want lenders to look at additional factors in lending decisions. According to Experian's State of Alternative Credit Data report, about 80% of borrowers expressed that consumers would likely share various types of financial information with lenders if it meant increased chances for approval or improved interest rates on credit.

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Digital technology can drive global financial inclusion by integrating alternative data sources in credit scoring and lending processes where credit invisibles could build their credit history and scores. These sources can include bills for utilities, telecommunications, and rent; alternative lending payments; and demand deposit account information such as recurring payroll deposits and payments―all of which are already part of people’s regular financial commitments. 

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According to Experian’s 2020 State of Alternative Credit Data report, 96% of lenders believe that non-traditional data allows them to evaluate creditworthiness better and reduce risk during times of economic stress. This proves home instrumental alternative data is for lending. With this type of data, financial institutions can increase financial inclusion while uncovering new lending opportunities for themselves.

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What it means to financial institutions

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Alternative data is just as beneficial to financial institutions. According to management consulting company Oliver Wyman, using alternative data sources can help lenders increase the number of profitable loans made in line with a given risk appetite. Lenders can also reduce transaction costs, lower aggregate credit losses for any cut-off defined by a marginal loss rate, and increase competitive interest rates.

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Of course, sifting through various alternative data sources requires a considerate amount of time. Lenders can streamline this process with the help of technologies such as artificial intelligence, deep learning, data analytics, and more. 

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Credolab, for instance, offers digital credit scoring solutions such as embedded scoring technology, which lenders can integrate into their systems to assess the creditworthiness of borrowers better. By implementing an alternative credit scoring method, lenders can issue credit or loans faster and more efficiently. At the same time, borrowers would no longer have to go through tedious processes just to apply for credit. Additionally, through our AI-enabled Fraud SDK solution, we can help lenders identify fraudulent customers early in the lending process, saving them time and effort from transacting with the wrong people.

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In compliance with local data privacy laws such as the General Data Protection Regulation, we use non-intrusive and anonymous metadata to protect credit applicants. 

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More credit-worthy people will have access to the money they need to make important investments by improving the lending process. And when more credit or loans are issued to borrowers, economies will generally perform better. The role of alternative data goes beyond helping credit invisibles finally become visible. Financial institutions should take this as a sign to reimagine their processes and open up more opportunities for people to be financially included.