The Economic Impacts of Alternative Data on Financial Inclusion

In a world where 1.7 billion adults remain unbanked – yet two-thirds of the unbanked own a mobile phone – it’s clear that consumers would benefit from the use of alternative data. But how would the impacts of alternative data manifest on the global economy? And would it truly expand credit access to a broader population, or simply widen the inequalities that already exist? We tackle these questions and more below. 

The impacts of alternative data on the market

One of the immediate impacts of alternative data is that when more consumers and small businesses are qualified for loans, the market gains more transactions and more funding. It’s no surprise, then, that bringing underbanked adults and small businesses into the formal banking sector could generate about $380 billion in new revenue. 

What’s more: alternative data expands revenue opportunity without increasing risk or other costs. In a case study on incorporating utility and telecom payment data into risk scoring models, the inclusion of this data improved both the accuracy of the score and the observed credit quality of the population by 20 percent. Thus, not only does alternative data increase the size of lenders’ marketable population, but it also mitigates risk. 

The inclusion of alternative data not only expands the marketing universe, but also improves accuracy and observed credit quality by 20%.

Between the proliferation of available alternative data sources and an increased appetite for alternative data among lenders and credit reporting agencies, there is a substantial growth opportunity for the global economy. Investors can see this potential: alternative data aggregation as an industry is projected to be worth $350 million in 2020. 

The impacts of alternative data on consumers

Overall, Equifax estimates that more than 91 million consumers in the U.S. alone are thin-file or no-file. About 22 million of those consumers will currently only qualify for subprime credit offers, meaning that if they do take on a loan, high rates will make it difficult for them to successfully pay it off. 

Meanwhile, low-income consumers, minority groups, and the young and elderly are disproportionately impacted by traditional scoring models. Hispanics and African-Americans are unscorable at twice the rate than the general population. Young adults, already disadvantaged without longstanding tradelines, are also less likely to take out auto loans or home loans than older generations. 

So how will the impacts of alternative data play out on these populations? Look no further than VantageScore to see the answer. Adding utility payment data into VantageScore’s credit score increased approval rates for low-income adults, African-Americans, and Hispanics by more than 20 percent – without overextending credit.

Adding utility payment data to VantageScore increased approval rates for low-income adults, African-Americans, and Hispanics by more than 20%.

A common objection to incorporating alternative data is that defaults on payments such as monthly utility bills are more common among low-income adults, so reporting of utility payments will merely widen the credit gap between low- and high-income consumers. But studies like VantageScore show that low-income and minority consumers see the greatest improvement in approval rates with the inclusion of alternative data.

In addition, many modern access channels for alternative data rely on consumer permission. Rather than forced reporting of utility and other non-traditional payments, consumers and small businesses can use these channels to opt-in to share alternative data – presumably only if they believe it will benefit their scores. 

Give credit where credit is due

On average, rent and utilities consume almost half of disposable income, yet consumers have been paying these bills for years without being recognized for their responsible financial behavior. Both the global economy and individual consumers stand to benefit from the greater credit access that alternative data enables. It’s time for lenders and reporting agencies to seize their opportunity and turn the potential impacts of alternative data into reality.

 

Interested in learning how to access consumer-permissioned payment data from utilities and telecoms? Speak with one of our experts today. 

You might also be interested in:

• Report: Building a Risk Model with Utility Payment Data
• Majority of U.S. Adults Are Willing to Share Utility and Telecom Data with Lenders
• True or False: Utility Payments Directly Affect Your Credit Score?

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