The use of alternative data to boost financial inclusion

The use of alternative data is becoming increasingly popular in the auto finance industry as a means of expanding access to credit. This approach involves the use of non-traditional data sources, such as utility bill payment history or rental payment history, to better understand a borrower's creditworthiness. By utilizing alternative data, lenders can provide loans to borrowers who may have been excluded from traditional credit scoring models due to a lack of credit history. This approach can help increase financial inclusion and expand access to credit for those who need it most. However, it is important for lenders to ensure that they are using alternative data in a fair and responsible manner, and are not unintentionally perpetuating existing biases or discrimination in the lending process.

Leveraging alternative data sources can help lenders expand their customer base and promote financial inclusion. According to Rikard Bandebo, Executive Vice President and Chief Product Officer of VantageScore, lenders must look beyond a borrower's credit score to gain a true understanding of their risk. Income, stability of income, and other factors such as assets, liabilities, and cash flow are also essential.

By using data from millions of consumers' checking and savings accounts, VantageScore was able to adjust its scoring models to provide a more accurate view of a borrower's creditworthiness. This helped increase credit access for more consumers while also improving the predictability of a borrower's likelihood of default. Alternative data sources can break the cycle of credit history dependence and help lenders make more informed credit decisions.

Financial inclusion is a crucial aspect of a healthy economy, and it requires lenders to tap into underserved markets. This involves looking beyond traditional credit scoring methods and leveraging alternative data sources to assess a borrower's creditworthiness. By using bank account data or other alternative data sources, lenders and fintechs can gain a more comprehensive view of a borrower's financial situation, including their income, assets, liabilities, and cash flow. This approach can help lenders extend credit access to more consumers and increase their addressable markets while also better predicting a borrower's likelihood of default.

The importance of financial inclusion cannot be overstated. Without access to credit, many individuals and small businesses are unable to achieve their financial goals and contribute to the economy. However, the traditional credit scoring system can be limiting, as it often only takes into account a borrower's credit history and payment track record. This can leave out important information about a borrower's overall financial situation, such as their income or assets. By leveraging alternative data sources, lenders can gain a more complete view of a borrower's financial health and make more informed lending decisions.

In order to truly leverage alternative data sources and increase financial inclusion, lenders and fintechs need to adopt more inclusive scoring models. This means using a wider range of data points, such as bank account data and credit file details, to assess a borrower's creditworthiness. By doing so, lenders can extend credit access to more consumers, including those who may have been previously excluded from traditional credit markets. Ultimately, this approach can lead to a more inclusive and robust financial system that benefits everyone.