The key to improving credit evaluation
Introduction
In a world where financial digitalization is advancing at a breakneck pace, traditional credit assessment based on bank histories and credit bureau reports falls short. Millions of individuals and small businesses lack a solid credit history, which limits their access to financing. This is where alternative data emerges as an innovative solution to optimize credit assessment, reduce risk, and promote financial inclusion. For banks and SOFOMES, integrating alternative data is not only a competitive advantage but a necessity in a constantly evolving financial market. In this blog, we will explore in depth what alternative data is, why it is crucial, and how to implement it effectively.
What is alternative data?
Alternative data is unconventional information used to assess the creditworthiness and financial behavior of individuals or companies. Unlike traditional data (credit reports), it comes from a variety of sources and provides a broader, more accurate view of the applicant's profile.
Key Alternative Data Sources:
- Bank transactions and financial movements: Income and expense history, recurring payments, and spending patterns.
- Social media and digital platform activity: Online behavior, interests, and digital reputation.
- Utility payment history: Electricity, water, phone, and internet bills.
- Telecommunications data: Mobile service usage, top-ups, and on-time payments.
- E-commerce: Purchase history, returns, and payment compliance.
- Geolocation and mobility: Movement patterns and residential stability.
Why are they key for Banks?
1. Expansion of the Customer Base
- They make it possible to assess people with no credit history ("thin file" or "no file"), such as young people, freelancers, and small businesses.
- They promote financial inclusion in underserved sectors.
2. Credit Risk Reduction
- They provide a more detailed and predictive view of financial behavior.
- They identify risk patterns that traditional models fail to detect.
3. Optimization of Decision Making
- By combining traditional and alternative data, lenders can offer products that are more personalized and better suited to each customer.
4. Greater Operational Efficiency
- They speed up credit assessment through machine learning and artificial intelligence.
- They reduce costs and approval times.
Success stories in the use of alternative data
LendingClub (USA)
- Analyze banking transactions and activity on social networks.
- It has reduced delinquency rates and improved financial inclusion.
Kreditech (Germany)
- It uses more than 20,000 data points, including browsing habits and online purchases.
- It has granted loans to more than 5 million people in the world.
Logging (Latin America and Africa)
- Evaluates creditworthiness from mobile phone data.
- It has provided credit to more than 6 million people in emerging markets.
How to implement alternative data
1. Identify relevant data sources
- Analyze which alternative data provides the most value for each customer profile.
2. Invest in Technology and Advanced Analytics
- Implement AI and machine learning to extract insights and automate decisions.
3. Ensure Security and Regulatory Compliance
- Comply with regulations such as Mexico's LFPDPPP and the GDPR in Europe.
4. Train Risk and Credit Teams
- Foster a data-driven culture and informed decision-making.
5. Conduct Pilot Tests
- Evaluate models and fine-tune algorithms before full deployment.
Long term benefits
- Higher profitability: Reduced risk and market expansion.
- Competitive advantage: Differentiation in the digitalized financial sector.
- Innovation and adaptability: The ability to respond to new technology trends.
- Financial inclusion: Positive impact on the economy and society.
Conclusion
Alternative data represents the future of credit assessment. Adopting it means not only reducing risk and improving profitability but also opening the doors of credit to millions of people and businesses that are excluded today.
At Finvero, we help you integrate innovative solutions based on alternative data to power your business. Request a demo and discover the future of credit today!