economic policy The economy of governments covers the systems for setting levels of taxation, government budgets, the money supply and interest rates as well as the labour market, national ownership, and many other areas of government interventions into the e ...

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

Types of alternative data

Alternative data in the broadest sense refers to any non-financial information that can be used to estimate the lending risk of an individual. Information includes: * Utility bills (such as

electricity Electricity is the set of physical phenomena associated with the presence and motion of matter that has a property of electric charge. Electricity is related to magnetism, both being part of the phenomenon of electromagnetism, as described ...

gas Gas is one of the four fundamental states of matter (the others being solid, liquid, and plasma). A pure gas may be made up of individual atoms (e.g. a noble gas like neon), elemental molecules made from one type of atom (e.g. oxygen), or ...

, and

heating oil Heating oil is any petroleum product or other oil used for heating; a fuel oil. Most commonly, it refers to low viscosity grades of fuel oil used for furnaces or boilers use for home heating and in other buildings. Home heating oil is often a ...

) * Telecommunications bills (such as

landline A landline (land line, land-line, main line, home phone, fixed-line, and wireline) is a telephone connection that uses metal wires or optical fiber telephone line for transmission, as distinguished from a mobile cellular network, which uses ...

s and

mobile telephones A mobile phone, cellular phone, cell phone, cellphone, handphone, hand phone or pocket phone, sometimes shortened to simply mobile, cell, or just phone, is a portable telephone that can make and receive calls over a radio frequency link whil ...

) * Rental payments * Electronic payments ( remittances, withdrawals, transfers, etc.) *

Social media Social media are interactive media technologies that facilitate the creation and sharing of information, ideas, interests, and other forms of expression through virtual communities and networks. While challenges to the definition of ''social medi ...

activity *

Psychometric Psychometrics is a field of study within psychology concerned with the theory and technique of measurement. Psychometrics generally refers to specialized fields within psychology and education devoted to testing, measurement, assessment, and ...

data * Telco data *

Smartphone A smartphone is a portable computer device that combines mobile telephone and computing functions into one unit. They are distinguished from feature phones by their stronger hardware capabilities and extensive mobile operating systems, whic ...

device

metadata Metadata is "data that provides information about other data", but not the content of the data, such as the text of a message or the image itself. There are many distinct types of metadata, including: * Descriptive metadata – the descriptive ...

Alternative data for credit in North America

United States

In the

United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territorie ...

, 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. If

immigrants Immigration is the international movement of people to a destination country of which they are not natives or where they do not possess citizenship in order to settle as permanent residents or naturalized citizens. Commuters, tourists, and ...

in the United States are included, that number exceeds 70 million. Access to credit is thus a

Catch-22 ''Catch-22'' is a satirical war novel by American author Joseph Heller. He began writing it in 1953; the novel was first published in 1961. Often cited as one of the most significant novels of the twentieth century, it uses a distinctive non-chr ...

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. 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. 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 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 score 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 bu ...

s of those that do not for example manage their rental payments on time in addition to their other credit arrangements

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 An alternative financial service (AFS) is a financial service provided outside traditional banking institutions, on which many low-income individuals depend. In developing countries, these services often take the form of microfinance. In develo ...

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 Kennesaw is a suburban city northwest of Atlanta in Cobb County, Georgia, United States, located within the greater Atlanta metropolitan area. Known from its original settlement in the 1830s until 1887 as Big Shanty, it became Kennesaw under its ...

, 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.

TransUnion 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 consum ...

, First American CredCo, and

LexisNexis LexisNexis is a part of the RELX corporation that sells data analytics products and various databases that are accessed through online portals, including portals for computer-assisted legal research (CALR), newspaper search, and consumer informa ...

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 A credit rating agency (CRA, also called a ratings service) is a company that assigns credit ratings, which rate a debtor's ability to pay back debt by making timely principal and interest payments and the likelihood of default. An agency may ra ...

. 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.

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 The World Bank is an international financial institution that provides loans and grants to the governments of low- and middle-income countries for the purpose of pursuing capital projects. The World Bank is the collective name for the Interna ...

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

, 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 Trade credit is the loan extended by one trader to another when the goods and services are bought on credit. Trade credit facilitates the purchase of supplies without immediate payment. Trade credit is commonly used by business organizations as a ...

data, such as records from cash and carry warehouses.Turner, Michael, Robin Varghese, et al. ''Information Sharing and SMME Financing in South Africa''
Political and Economic Research Council (PERC), p58.

References

{{reflist Credit management