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Alternative Credit Scoring
Discover how alternative credit scoring uses non-traditional data to improve lending decisions and increase financial access.
Discover how alternative credit scoring uses non-traditional data to improve lending decisions and increase financial access.
Traditional banking institutions rely on consumers’ financial information when making lending decisions.
As a result, nearly 27% of the world’s working population cannot rely on receiving credit from a bank. These are the so-called “credit invisibles” – individuals without a credit history or rating.
Modern fintech companies and other online lenders have found a solution to this issue. They are increasingly turning to the use of alternative data for credit scoring.
Alternative, or non-traditional credit scoring, is the practice of using an expanded range of data to assess the reliability and creditworthiness of a borrower.
This data surpasses the traditional approach to risk assessment, which is limited to the borrower’s financial history.
It includes information about the user's online activity, such as online registrations, mobile usage, e-commerce transactions, and much more.
The use of alternative credit scoring models could mark the beginning of a new era in lending, characterized by increased financial accessibility, optimized decision-making, and lower default rates.
To properly assess the reliability and creditworthiness of an applicant, it is crucial for lenders to draw accurate conclusions from the alternative data collected.
Here are key factors to consider:
Presence of social media profiles. According to statistics, an average user has more than six social media accounts. Therefore, the absence of registered profiles may indicate fraudulent activity.
It's also important to consider profiles on professional social networks, such as LinkedIn. First, having such profiles indicates a person's interest in career development. Second, they provide valuable information about their education and employment history.
Online transaction data. Information about purchases on e-commerce platforms, payments for paid subscriptions, the history of using digital wallets, and other payment tools can be informative.
Based on this data, one can assess the borrower’s purchasing habits, responsibility, and tendency toward impulsive behavior.
Type of device and services used. Positive indicators in alternative credit scoring may include:
Borrower’s location. Alternative credit scoring allows for the detection of even the slightest inconsistencies in the applicant's location data. Lenders can compare the address listed on the credit application, the device’s IP address, geolocation tags from social media, and more.
Moreover, advanced technologies can help determine the exact address of the applicant. For instance, applying for a loan from a correctional facility may be sufficient grounds for service denial.
Analyzing alternative data when assessing potential borrowers helps lenders overcome many challenges.
Modern data enrichment solutions allow financial institutions to expand their target audience by lending to the following categories:
1. Unbanked or underbanked individuals. This is especially important for developing markets. While only 7% of the population in the U.S. lacks access to financial services, in countries like Mexico, Nigeria, and others, the unbanked population exceeds 60%:
2. People without official income. Legal employment is one of the mandatory requirements for obtaining a loan from banks. Nonetheless, the World Bank reports that over 47% of workers worldwide are self-employed.
In developing countries, the situation is even more severe. For instance, in Nigeria, this figure exceeds 85%, and in India, it is 74%.
At the same time, Payoneer analysts state that the average freelancer earns $21 per hour, which surpasses most official hourly wages. This allows self-employed individuals to meet their financial obligations to lenders.
Alternative credit scoring companies provide financial institutions with hundreds of data points about consumers, enabling them to make an informed decision about the borrower’s creditworthiness.
Another key point is that this approach uses real-time data, unlike traditional credit scoring, which only relies on outdated historical data.
Businesses encounter financial fraud attempts every day.
According to a recent survey, 97% of financial institutions fell victim to fraudsters in 2023, and 61% of them reported an increase in fraudulent attacks compared to the previous year.
To combat fraudsters, alternative credit scoring offers several verification checks, including email lookup, phone number lookup, IP lookup, and others.
These checks help detect fraud attempts at the application stage. As a result, lenders can reduce KYC costs and lower the percentage of loans issued to fraudsters.
Alternative credit scoring can surely be regarded as the future of contemporary lending. It expands the capabilities of financial institutions by providing credit to unbanked individuals, effectively combating fraud, and improving credit decision-making.
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