Competition is not a new force in the lending industry, but the current climate is bringing a new set of challenges.
The drive to grow organically has been complicated by shifting demographic trends and consumer behaviors. At the same time, increased pressure on interest rates has made it even more critical to price offerings effectively.
These market dynamics have driven many lenders to reevaluate their customer acquisition strategies and look for new ways to expand their portfolios. Many of you may have expanded offerings to potential borrowers who would have traditionally been scored below prime when using only traditional credit models.
The ability to effectively assess risk, while still appropriately pricing offerings for prime borrowers, as well as traditionally underbanked and unscorable consumers, is rapidly becoming a competitive differentiator in the lending industry.
Highlighting this trend, a new benchmark survey commissioned by TransUnion and conducted by third-party research firm Versta Research, has uncovered a growing divide between lenders that have adopted alternative data versus those that are still relying exclusively on traditional scores to evaluate borrowers.
The survey of 317 lenders revealed that adopters of alternative data are improving their competitive positioning. Conversely, the benchmark data also revealed there is still significant unrealized opportunity for more lenders to utilize alternative data to evaluate both prime and non-prime borrowers.
On one end of the spectrum, The State of Alternative Data report revealed that adopters of alternative data are seeing significant payoffs—in a relatively short period of time. In fact, 48% of adopters reported alternative data has made them more competitive in the marketplace.
Some of the specific competitive payoffs cited by adopters of alternative data include:
- Seeing tangible benefits within the first year of using alternative data
- Reaching more creditworthy consumers in current markets
- Gaining better risk assessment among unbanked consumers
- Opening up new markets
The survey also revealed alternative data is not only being used to evaluate thin-file or no-file consumers, as 38% of adopters said they are actively using the data to evaluate prime-quality borrowers.
The benchmark data provided clear proof points for adopters and also found the application of these models is still largely underutilized, representing a growing divide between users and non-users.
While more than half of respondents believe alternative data will become widely used within the next three years, only 34% are currently using these models.
There is relatively low utilization despite most lenders agreeing that market dynamics are creating a need for new models and approaches. For example, the survey found that 87% of lenders say they decline at least some credit applicants because they cannot be scored.
Based on these market realities, we anticipate adoption of alternative data will quickly become a competitive imperative. The survey found another 21% of lenders plan to start using alternative data within the next five years.
Mike Mondelli is senior vice president of TransUnion’s alternative data services. He can be reached at firstname.lastname@example.org or 404-601-6319.