Alternative Data Is No Longer ‘Alternative’ for Credit Unions

In the lending world, alternative data – Fair Credit Reporting Act-compliant information not included in a traditional credit report – has gone mainstream. What’s more, it’s no longer viewed as “alternative.” For any financial institution looking to offer the most opportunities to its customers, maximizing use of alternative data sources – including telecommunication (telco), utility and specialty finance data – in credit assessments is essential.

This especially holds true for credit unions, which can gain the same advantages through alternative data use that larger financial institutions have long benefitted from. These include potentially extending credit more often within existing risk profiles; expanding addressable lending markets; promoting fair and equitable lending and consumer financial health; and building member loyalty and lifetime value.

There may be more alternative data than ever, but for years only the largest and most sophisticated financial institutions possessed the wherewithal to put these statistics and information to maximal use for customers. Today, though, powerful, ready-made credit scoring solutions can be implemented by any financial institution, no matter their size.

More Resources to Serve Their Members

It’s no surprise that major global institutions, as well as large regional banks, have developed advanced technology stacks and business operations to incorporate alternative data in complex ways. While financial institutions most often apply alternative data to loan decisioning, account management and marketing, this information has uses across the customer journey.

By comparison, credit unions typically have smaller budgets and limited technology stacks available to ingest and process alternative data. They also tend to have fewer staff resources, such as analytics experts and modelers, than larger institutions.

But credit unions play an incredibly important role with their members and communities. Knowing these audiences and their businesses allow them to offer personalized services that focus on specific needs, including support in managing their credit and outstanding debts and providing more borrowing options at competitive rates. Using alternative data sources to extend credit can help these smaller lenders serve a community more comprehensively, and create a lifetime relationship with more members.

Bringing in new members and/or retaining members is even more top of mind for credit unions currently, as elevated interest rates, lingering inflation and rising debt-to-income ratios have made borrowing more expensive and meeting financial obligations more difficult. Consumers have noticed. In fact, according to an April 2023 Gallup survey, “Americans remain guarded about their personal finances, with the majority (55%) saying their financial situation is ‘only fair’ or ‘poor’ rather than ‘excellent’ or ‘good’ (45%).” Also, according to Gallup, “Americans report that their financial situation is worsening (50%) rather than improving (37%).”

Alternative Data Expands the Addressable Market

Even as traditional credit reports remain an effective indicator of credit history and past financial reliability, alternative data can be used to responsibly expand access to credit and support a more inclusive economy by painting a fuller picture.

This valuable and insightful data could help an additional 8.4 million previously unscorable consumers become scoreable, according to a 2023 Equifax Access to Credit and Alternative Data report.

In the case of specialty finance data, many consumers use short-term, high-interest loans – including subprime, payday and title loans – for a variety of reasons. Examining these tradelines can reveal potential members who have paid specialty finance loans consistently and are ready for more mainline lending. Using alternative data to reach these borrowers widens a market of underbanked credit rebuilders who’d been forced into expensive subprime loan situations that many mainline financial institutions dismiss.

Using the Right Tools to Maximize Alternative Data Use

Off-the-shelf solutions build alternative data into consumable scores, bringing the value of these data sets down-market in ways that previously weren’t practical. Lenders using new risk scores that leverage alternative data to optimize model performance see a 17% predictive lift across portfolios, Equifax analytics show, and up to a 7% increase in approval rates without increasing risk.

Moreover, using these ready-made tools can help credit unions deepen member relationships and build loyalty. For example, these lenders may now provide competitive credit offers at just the right time to the right prospective borrowers. They can do this by employing alerts to detect when members are shopping for loan offers, then intelligently using alternative data to find worthy borrowers who otherwise wouldn’t have access to credit through traditional screening methods.

Additionally, financial institutions with fewer resources can avail themselves of off-the-shelf scoring model solutions that incorporate alternative data, potentially allowing them to extend credit to those with low- or no-credit scores and unlocking many potential borrowers. 2024 Equifax research shows that leveraging these alternative data sources could shift 8.4 million more U.S. consumers into scorable credit bands, potentially producing many more borrowers, as well as loyal members, while expanding inclusive lending practices.

Alternative Data Is No Longer Alternative, It’s Necessary

Credit unions looking to expand their relationships and increase the overall lifetime value for their members must include alternative data in their loan decisioning processes to compete with larger financial institutions for more lending opportunities.

A single financial opportunity can be a critical first step to establishing individual financial health and generational wealth that can change the trajectory and livelihood of families and communities for generations. Using alternative data can help credit unions extend more of these opportunities to spur positive economic change.

Tammy VanWambeke is SVP of Financial Services and Enabling Technology for Equifax.