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Exploring the Power of Alternative Data in Credit Decisioning: How Banks are Leveraging Non-Traditional Data Sources to Improve Decisions

Banks use alternative data, such as social media, mobile phone data, and online shopping behavior, to gain a complete view of their customers and improve credit decisions. Alternative data can provide valuable insights into a borrower’s creditworthiness that traditional data sources may not reveal. These data insights can lead to improved accuracy, increased access to credit, reduced risk, and increased customer engagement. Companies like Lenddo, Kabbage, Experian, ZestFinance, and Alterna Bank are already using alternative data to make better credit decisions and improve customer experience. As digital data grows, using alternative data in credit decisions is likely to become more prevalent in the banking industry.

Introduction:

Traditionally, banks have relied on traditional data sources, such as credit reports and financial statements, to make credit decisions. However, with the explosion of digital data, banks are now turning to alternative data sources to gain a complete view of their customers and improve credit decisions. Alternative data includes non-traditional data sources, such as social media, mobile phone data, and online shopping behavior, that can provide valuable insights into a borrower’s creditworthiness.

In this blog post, we’ll explore how banks are using alternative data in credit decisions and the benefits it can provide. We’ll also look at some examples of banks and alternative data providers already using these new data sources to make better credit decisions.

Understanding Alternative Data

Alternative data refers to any data not typically used in traditional credit decisions, such as credit reports and financial statements. This data can include information from social media, mobile phone data, online shopping behavior, wearables, smart home devices, and other Internet of Things (IoT) devices.

Alternative data can provide valuable insights into a borrower’s creditworthiness that traditional data sources may not reveal. For example, social media data can provide information on a borrower’s income, employment, and spending habits, while mobile phone data can provide insights into a borrower’s location and communication patterns. Additionally, alternative data can also be used to verify the information provided by borrowers, such as income and employment, and detect fraud.

Benefits of Using Alternative Data in Credit Decisioning

By leveraging alternative data, banks can gain a fuller view of their customers and make more informed credit decisions. The benefits include:

  • Improved accuracy: Alternative data can provide a complete picture of a borrower’s creditworthiness, which can help banks make more accurate credit decisions.
  • Increased access to credit: Alternative data can help banks identify borrowers they may have overlooked using traditional credit screening methods, such as those with limited credit histories or underbanked.
  • Reduced risk: Alternative data can help detect fraud and verify the information provided by borrowers, which can help banks reduce the risk of lending to risky borrowers.
  • Increased customer engagement: By using alternative data, banks can offer their customers more personalized products and services, which can improve customer engagement and loyalty.

Examples of Banks and Alternative Data Providers

  • Lenddo: This company uses alternative data, such as social media data, to make credit decisions for borrowers in emerging markets.
  • Kabbage: This company uses alternative data, such as online sales data, to make credit decisions for small businesses.
  • Experian: This credit bureau now offers alternative data, such as rental payment data, to help lenders make more informed credit decisions.
  • ZestFinance: This company uses machine learning to analyze alternative data, such as online behavior, to make credit decisions for borrowers with limited credit histories.
  • Alterna Bank: This Canadian digital bank uses alternative data, such as utility and mobile phone bill payments, to assess customers’ creditworthiness.

Conclusion

Alternative data is providing a new way for banks to make credit decisions. Banks can gain a complete view of their customers and make more informed credit decisions by leveraging non-traditional data sources, such as social media, mobile phone data, and online shopping behavior leading to improved accuracy, increased access to credit, reduced risk, and increased customer engagement. As digital data grows, using alternative data in credit decisions is likely to become more prevalent in the banking industry, helping banks better serve their customers’ needs while minimizing risk.

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