New Research on Alternative Credit Data Shows Customer and Industry Interest

The Center for Financial Services Innovation released two papers on alternative credit data today.

The first, “Market Interest in Alternative Data Sources and Credit Scoring,” investigates the potential interest in alternative data on the lender side, by interviewing senior lending officers and other key decision-makers at 23 major financial institutions. The second, “Accessing Credit: The Role of Private Loan Services for Underbanked Clients and Prospects at CircleLending,” surveys users of CircleLending’s pioneering process to formalize and automate private person-to-person loans, to better understand why customers chose this credit option, and how it effected their behavior.

Said Jennifer Tescher, CFSI’s Director, “Together, these studies show that there is a market for alternative credit data and solutions, and that underbanked consumers can be reliable and valuable borrowers given the right opportunity. This approach is in its infancy, and significant work needs to be done for it to have a broad impact on the lending industry as a whole.”

CFSI’s interviews with credit risk officers, in conjunction with its continuing work on improving lending in the underbanked market, reveal a widespread, albeit cautious interest in alternative credit data across the industry. With other market segments heavily saturated, lenders realize that underbanked customers, particularly underscored prospects, hold the key to continued growth.

Almost every executive interviewed had heard of the various alternative credit solutions discussed, and several institutions that participated in the study were already piloting one of these options. Significant work is still needed, however, in order to achieve the reliability and scale that will encourage broad acceptance by lenders. This includes determining the most relevant data sets, developing systems to broadly gather data, infiltrating automated decisioning systems, and better targeting of customers.

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The CircleLending research found that low-to-moderate income customers choose private loans primarily because they are shut out of the traditional lending system, either because they are “underscored,” meaning that they have a thin or nonexistent credit file, or because of past credit problems. They greatly appreciate the opportunity to formalize this process and use it to establish or improve their credit history. Almost one out of ten American households has an outstanding loan to either a family member or a friend; it currently represents over 4% of the total consumer credit market, according to the Federal Reserve Board.

Said Asheesh Advani, founder and President of CircleLending, “Understanding the complete credit profile of an individual borrower requires understanding all their debt obligations – to institutions and to other individuals. CircleLending pioneered the person-to-person loan business five years ago and we have seen how institutional lenders have to come to view person-to-person loan data as a relevant part of an individual’s complete credit profile.”