By John Flynn, Open Lending President & CEO
Alternative data in lending decisions has been a growing practice in recent years. Many companies, including Open Lending, use data analytics to provide lenders better insight into a borrower’s habits than traditional credit data. Is the data that much more accurate?
Alternative data allows lenders to access a more comprehensive picture of the borrower. It includes information such as bill payments, education history and employment history. It does a better job of taking into account life, both the good and the bad. You learn not only about the borrowers prior path, as you would find in a credit score, but also get a picture of their potential in the future.
This additional information can help account for hardships in a borrower’s life. Some of these can be drastic in the short term, that would have a significant impact on traditional methods of credit decisioning, such as credit scores which are a snapshot in time. Imagine a loss of job, significant health challenge or disaster. These life changing events can impact a customer for months, if not over a year. All of these events are a short-term heavy financial burden and can force a borrower to prioritize debt payments. Maybe loan payments start coming in late, lowering their credit score. This person may have been a prime borrower a few short months prior but may now have difficulty gaining access to financial products to help improve their situation and turn their situation around.
By looking deeper into a borrower’s behavior with the additional data sets, lenders can draw more insights and ultimately make a better credit decision by seeing that one or two bills are falling behind, they are staying current with other expenses, such as their mortgage or rent, utilities and other bills. You can see the potential of a strong employment history, even if a temporary setback has befallen them.
Experienced lenders, such as those we have at Open Lending, believe that customers are more than just a credit score. We leverage alternative data so we can help lenders make decisions that are more accurate and appropriately priced for risk. By adding additional information to the credit decisions, your bank or credit union will find that you can say ‘yes’ to more loans and provide them better products at better rates because you better understand your borrowers.
Alternative data can power your lending business forward. In the short term Open Lending helps your institution make more data-driven credit decisions, helping your customers and driving growth. In the long-term, it can help shape your products to better fit your member and customer’s journey, helping establish a long-term relationship by assisting consumers in times of need while evolving to meet their needs as your data set matures.