Alternative data

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In economic policy, alternative data refers to the inclusion of non-financial payment reporting data in credit files, such as telecom and energy utility payments.

Contents

Types of alternative data

Alternative data [1] in the broadest sense refers to any non-financial information that can be used to estimate the lending risk of an individual. Information includes:

Alternative data for credit in North America

United States

In the United States, credit files include negative information, such as delinquencies as well as positive information, such as repayment of debts. Still, an estimated 35 to 54 million Americans have insufficient credit information to qualify for mainstream credit. [2] If immigrants in the United States are included, that number exceeds 70 million. [3] Access to credit is thus a Catch-22 for many poor Americans—one needs credit to get credit. Research suggests that the inclusion of alternative data in credit files could bring many of these individuals into the credit fold. [4] That is, non-financial positive payment information, such as rents or utility payments, may give credit agencies enough information to rate previously unscorable individuals known as the unbanked. These newly scored individuals have risk profiles similar to those already in the mainstream credit system. [5] Furthermore, loans become smarter. Including alternative data has little effect on the credit mainstream, those already scorable in the current system. Furthermore, this increase in data decreases the number of bad loans [6]

Experian purchased RentBureau in June 2010, which houses rental payment histories on over 7 million US residents, this data will now be included in consumer credit reports as of January 2011. This will benefit those that overlap with the 50 million US underbanked consumers. The danger with this, is that it will provide a further variable to damage credit scores of those that do not for example manage their rental payments on time in addition to their other credit arrangements [7]

Current use of alternative data

Since the financial crisis of late 2008, many Americans have struggled with the negative change to their credit score. Reduced credit lines resulting in a new group of consumers in need of liquidity forced this growing consumer segment to seek alternative financial services providers. Businesses relying on traditional credit reports to make credit decisions have had limited to no visibility on the new credit usage behaviors of this growing portion because alternative data is not information that the traditional bureaus capture or tend to report.

Utilities and telecoms firms in several states have started reporting their data to CRAs. PRBC, a consumer credit reporting agency based in Kennesaw, Georgia, allows consumers to self-enroll and build a positive credit file based on their timely payments for bills such as rent, utilities, cable, telephone, and insurance that are not automatically reported to the other bureaus. [8] TransUnion, First American CredCo, and LexisNexis have all recently released products involving alternative data.

Concerns about the use of alternative data in credit files

Some concerns about the use of alternative data have been raised over the long-term consequences of fully reporting utility and telecom payments to credit rating agencies. [9] There are concerns that state and local incentives to not pay bills on time (for example, some states provide heating oil subsidies if payments are missed) may cause deterioration in credit scores over time. There is also concern that people who open accounts with only alternative data will become over-extended. Recent research shows, however, that the inclusion of alternative data does not degrade credit scores over a one-year period. [10]

Alternative data for credit worldwide

Fully reported non-financial payment data has been included in consumer credit reports in many countries around the world including the United Kingdom, Germany, Italy, Australia, China, Mexico, and Colombia to name a few. Indeed, Colombia has used this data successfully for more than 40 years.

Recently, the World Bank issued a global credit information sharing standard that included a section on alternative data. The World Bank steadfastly endorses the use of fully reported non-financial payment data in credit origination processes and considers it a powerful tool for driving financial inclusion in emerging markets. More recently, in the Financial Inclusion 2020 Roadmap, Accion highlighted the great value of alternative data as an instrument to increase financial inclusion and help achieve their FI2020 objectives.

In low-income nations, alternative data is often the only type of data available for credit scoring. The population is often not formally employed, lacks a credit history, cannot fulfill loan application requirements, and has insufficient capital. Even when these requirements are fulfilled, lending institutions often have very little experience with clients' economic activity leading to untailored loan products.

Electronically-available alternative data, such as social media activity, bill payments, mobile telephone bills and metadata, rental payments, and electronic transaction data, could be used to score these individuals and enter millions in low-income countries into a more modern credit ratings system.

An especially promising option is the full reporting of trade credit data, such as records from cash and carry warehouses. [11]

See also

Related Research Articles

A credit score is a number that provides a comparative estimate of an individual's creditworthiness based on an analysis of their credit report. It is an inexpensive and main alternative to other forms of consumer loan underwriting.

<span class="mw-page-title-main">Experian</span> Irish multinational consumer credit reporting company

Experian is a multinational data analytics and consumer credit reporting company headquartered in Dublin, Ireland. Experian collects and aggregates information on over 1 billion people and businesses including 235 million individual U.S. consumers and more than 25 million U.S. businesses.

<span class="mw-page-title-main">Fair Credit Reporting Act</span> U.S. federal legislation

The Fair Credit Reporting Act (FCRA), 15 U.S.C. § 1681 et seq., is federal legislation enacted to promote the accuracy, fairness, and privacy of consumer information contained in the files of consumer reporting agencies. It was intended to shield consumers from the willful and/or negligent inclusion of erroneous data in their credit reports. To that end, the FCRA regulates the collection, dissemination, and use of consumer information, including consumer credit information. Together with the Fair Debt Collection Practices Act (FDCPA), the FCRA forms the foundation of consumer rights law in the United States. It was originally passed in 1970, and is enforced by the U.S. Federal Trade Commission, the Consumer Financial Protection Bureau, and private litigants.

TransUnion is an American consumer credit reporting agency. TransUnion collects and aggregates information on over one billion individual consumers in over thirty countries including "200 million files profiling nearly every credit-active consumer in the United States". Its customers include over 65,000 businesses. Based in Chicago, Illinois, TransUnion's 2014 revenue was US$1.3 billion. It is the smallest of the three largest credit agencies, along with Experian and Equifax.

<span class="mw-page-title-main">Equifax</span> American multinational consumer credit reporting agency in Atlanta, Georgia

Equifax Inc. is an American multinational consumer credit reporting agency headquartered in Atlanta, Georgia and is one of the three largest consumer credit reporting agencies, along with Experian and TransUnion. Equifax collects and aggregates information on over 800 million individual consumers and more than 88 million businesses worldwide. In addition to credit and demographic data and services to business, Equifax sells credit monitoring and fraud prevention services directly to consumers.

A credit history is a record of a borrower's responsible repayment of debts. A credit report is a record of the borrower's credit history from a number of sources, including banks, credit card companies, collection agencies, and governments. A borrower's credit score is the result of a mathematical algorithm applied to a credit report and other sources of information to predict future delinquency.

A credit bureau is a data collection agency that gathers account information from various creditors and provides that information to a consumer reporting agency in the United States, a credit reference agency in the United Kingdom, a credit reporting body in Australia, a credit information company (CIC) in India, Special Accessing Entity in the Philippines, and also to private lenders. It is not the same as a credit rating agency.

A credit score is a numerical expression based on a level analysis of a person's credit files, to represent the creditworthiness of an individual. A credit score is primarily based on a credit report, information typically sourced from credit bureaus.

VantageScore is a consumer credit-scoring system in the United States, created through a joint venture of the three major credit bureaus. The model is managed and maintained by an independent company, VantageScore Solutions, LLC, that was formed in 2006 and is jointly owned by the three bureaus.

A credit freeze allows an individual to control how a consumer reporting agency is able to sell personal financial identity data. The credit freeze locks the data at the consumer reporting agency until the individual gives permission for the release of the data.

AnnualCreditReport.com is a website jointly operated by the three major U.S. credit reporting agencies, Equifax, Experian, and TransUnion. The site was created in order to comply with their obligations under the Fair and Accurate Credit Transactions Act (FACTA) to provide a mechanism for American consumers to receive up to three free credit reports per year.

Credit analysis is the understanding and evaluation to check if an individual, organization, or business is worthy of credit.

Connect, formerly PRBC, is a consumer credit reporting agency, more commonly referred to as a credit bureau in the United States. It is similar to the other four U.S. credit bureaus in that it is an FCRA compliant national data repository. Connect differs in that consumers are able to self-enroll and report their own non-debt payment history, and they can build a positive credit file based on alternative data, such as timely payments for bills including rent, utilities, cable, telephone, and insurance that are not automatically reported to the other bureaus.

An identity score is a system for detecting identity theft. Identity scores are increasingly being adopted as a means to prevent fraud in business and as a tool to verify and correct public records.

Discover Financial Services is an American financial services company that owns and operates Discover Bank, an online bank that offers checking and savings accounts, personal loans, home equity loans, student loans and credit cards. It also owns and operates the Discover and Pulse networks, and owns Diners Club International. Discover Card is the third largest credit card brand in the United States, when measured by cards in force, with nearly 50 million cardholders. Discover is currently headquartered in the Chicago suburb of Riverwoods, Illinois.

TransUnion CIBIL Limited is a credit information company operating in India. It maintains credit files on 600 million individuals and 32 million businesses. TransUnion is one of four credit bureaus operating in India and is part of TransUnion, an American multinational group.

<span class="mw-page-title-main">CRIF High Mark Credit Information Services</span> Indian credit bureau

CRIF High Mark Credit Information Services Pvt. Ltd. is an RBI-approved credit bureau in India. It serves retail, agriculture and rural, MSME, commercial and microfinance.

Credit Environment India is with Credit Information Companies Act getting passed by the Government of India in 2005, Credit Bureau formally got introduced to the country. CIBIL was established as the first credit bureau. TransUnion International Inc, one of the leading consumer credit bureaus in the world, is the major stake holder (27.5%) in CIBIL and provided the required platform to commence operations.

MicroBilt Corporation is a credit reporting company and alternative credit data provider. Since its founding in 1978, it has grown by acquisition to challenge its larger rivals. Its PRBC consumer credit subsidiary offers consumers the ability to self-report on the bill paying habits as a means of positively impacting their credit score. MicroBilt’s other subsidiaries focus on business credit and services to sub-prime lenders. Many of the company's products are designed to help businesses accurately assess risk on consumers who otherwise have thin traditional credit files. In doing so, credit can be extended to consumers where it couldn't before opening a new customer base to a company and new opportunities to a consumer.

Credit scoring systems in the United States have garnered considerable criticism from various media outlets, consumer law organizations, government officials, debtors unions, and academics. Racial bias, discrimination against prospective employees, discrimination against medical and student debt holders, poor risk predictability, manipulation of credit scoring algorithms, inaccurate reports, and overall immorality are some of the concerns raised regarding the system. Danielle Citron and Frank Pasquale list three major flaws in the current credit-scoring system:

  1. Disparate impacts: The algorithms systematize biases that have been measured externally and are known to impact disadvantaged groups such as racial minorities and women. Because the algorithms are proprietary, they cannot be tested for built-in human bias.
  2. Arbitrary: Research shows that there is substantial variation in scoring based on audits. Responsible financial behavior can be penalized.
  3. Opacity: credit score technology is not transparent so consumers are unable to know why their credit scores are affected.

References

  1. ↑ Denev, Alexander; Amen, Saeed. The book of alternative data a guide for investors, traders and risk managers. Hoboken. ISBN   978-1-119-60180-7. OCLC   1178956293.
  2. ↑ Mohl, Bruce (2006-05-21). "Boston Globe, Verizon's 'free gift' to customers: Giving payment data to credit bureaus". Boston.com. Retrieved 2009-05-02.
  3. ↑ "National Credit Reporting Association Press Release" (PDF). Archived from the original (PDF) on 2008-07-05. Retrieved 2009-05-02.
  4. ↑ "Give Credit Where Credit Is Due" (PDF). Archived from the original (PDF) on 2008-08-20. Retrieved 2008-09-10.
  5. ↑ You Score, You Win
  6. ↑ Turner, Dr. Michael. "Give Credit Where Credit Is Due" (PDF). Archived from the original (PDF) on 2012-01-18. Retrieved 2011-06-28.
  7. ↑ [ permanent dead link ] Experian Credit Reports Include Rental Data
  8. ↑ Levisohn, Ben (2008-04-10). "The Credit Rating in Your Shoebox". Businessweek.com. Archived from the original on April 22, 2008. Retrieved 2009-05-02.
  9. ↑ "THE CONSUMER IMPACT OF REGULATORY RELIEF PROPOSALS AFFECTING BANKS, THRIFTS AND CREDIT UNIONS | Congressional Testimony March 1, 2006" (PDF). Senate.gov. Senate Committee on Banking, Housing, and Urban Affairs. 2006-03-01. Retrieved 2023-07-19.{{cite web}}: CS1 maint: url-status (link)
  10. ↑ Turner, Michael; Lee, Alyssa; Varghese, Robin; Walker, Patrick (2008). "You Score, You Win | The Consequences of Giving Credit Where Credit is Due" (PDF). Retrieved 2023-06-29.{{cite web}}: CS1 maint: url-status (link)
  11. ↑ Turner, Michael A.; Varghese, Robin; Walker, Patrick. "Information Sharing and SMME Financing in South Africa: A Survey of the Landscape" (PDF). InfoPolicy.org. Wayback Machine. Archived from the original (PDF) on 2008-10-01. Retrieved 2023-07-19.
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