Exploring the Impact of Alternative Data on Creditworthiness

Looking at a consumer’s credit history may seem like the most logical way to assess their creditworthiness at first glance. However, if you dig deeper, there are a number of drawbacks to this approach.

For this reason, lenders are increasingly using alternative data for credit scoring.

Relying only on traditional data, a credit organization cannot reach the unbanked population. Also, such data is insufficient to accurately predict default and detect fraud.

Alternative data: what is it, and how is it used in credit scoring?

Alternative data is information that goes far beyond the traditional approach to assessing the creditworthiness of borrowers. It does not relate to a consumer’s credit history. 

To obtain them, instead of information from credit bureaus, financial institutions can analyze the digital footprint of users. This can include data on utility payments and online transactions, information on activity in social networks and other resources, the presence of paid subscriptions, and mobile phone usage.

All of the above data is used by financial companies for such purposes:

1. Reaching consumers with no credit history. Classic banking institutions cannot give credit to unbanked people. After all, they assess the creditworthiness of applicants based on historical financial data.

Alternative sources of information are able to provide enough data points to form an exhaustive portrait of a potential borrower. Even if an applicant has never been a client of credit organizations before.

2. Increased efficiency of risk assessment. Thanks to alternative data, the lender can get a comprehensive view of the applicant. Starting from the financial situation and ending with character traits that may indicate a propensity for delinquency.

In addition, non-traditional sources provide real-time information. However, the data stored by credit bureaus is historical. Therefore, at the time of contacting a creditor, their relevance may be questionable.

3. Combating fraud. Analyzing the digital footprint involves the use of progressive technologies. They are able to improve the process of identity verification and recognize signs of fraud that are already at the stage of considering a loan application.

The result will be substantial savings on Know Your Customer (KYC) checks and a decrease in the issuance of criminally originated loans.

4. Personalization of loan products. Studying consumers’ digital footprint will allow lenders to learn more about their consumer preferences. This will enable them to create a unique offer for each customer that caters to their needs.

In addition, a digital credit score will help adjust the loan terms for each borrower depending on the risk level assigned to them. For example, high-risk applicants may be offered a loan with higher interest rates.

The role of alternative data in forming a digital credit score

Various types of non-traditional data are used in credit scoring. Each has some impact on the final digital credit score.

Email

An email address is an informative source of alternative data.

Here’s what it allows you to discover:

• Registered profiles on social media and other platforms.
• Activity and age of the mailbox.
• Presence/absence of data leaks.
• Domain information.
• Adding an address to blacklists.

The presence of several linked social media profiles, the fact of data leaks, and the deliverability of emails will have a positive impact on the credit score – this will indicate that the address is “live”.

Phone number

You can also find a lot of information about the borrower by the phone number left on the application form:

• Type of number (disposable, inactive, burner phone, virtual SIM, etc.)
• Number code and operator’s country.
• Presence of the subscriber in blacklists and other high-risk databases.

A mismatch between the country of registration of the number and the place of residence indicated in the application may indicate an attempt by the borrower to hide a real location.

The use of a disposable phone number or a virtual SIM card may also reveal a fraudster. 

IP address

IP address lookup allows you to establish the exact location of the applicant. 

Here are the possibilities the lender gets:

• Compare the address specified in the application with the real geolocation of the device.
• Establish the fact of an attempt to hide the real IP address by using an anonymizer.
• Determine the type of connection (residential, commercial, or mobile) and the type of address (public or private).

Thanks to reverse geocoding technology, the lending organization can obtain the exact address from where the loan application was sent. The borrower’s location in certain institutions (e.g., prison) can be a strong argument against the transaction.

Differences between the geolocation of the device and the specified place of residence will lower the credit rating. The use of VPN, proxy, and other similar services may also be perceived as a sign of criminal intent.

Social media activity

Social media is probably the most informative source of non-traditional consumer data.

Here’s what a lender can glean from them:

• The platforms on which the user has registered accounts.
• Content published and avatars posted.
• Account type.
• Geolocation tags.
• Personal data (first name, last name).

One of the signs of fraud is the absence of registered accounts.

Mismatched avatars and usernames on multiple profiles are also suspicious.

Online transactions

These transactions include any online payments made by a consumer:

• Payments for purchases on e-commerce platforms.
• Payments for subscriptions.
• Digital wallet transactions, etc.

A borrower may be assigned a high risk of default if they make late regular payments or make ill-considered purchases (e.g., at night).

Also, certain attributes may indicate that the applicant’s financial situation is unstable. For example, frequent returns and a high percentage of abandoned baskets.

The power of digital footprint analysis at RiskSeal

RiskSeal Digital Credit Scoring system is a powerful tool for collecting alternative data through digital footprint analysis.

In a few simple steps, we enrich our clients’ scorecards and optimize their workflows:

• Research an applicant’s digital footprint on 140+ global and local platforms.
• Provide 300+ data points to the client, enough to build a detailed profile of an applicant even without a credit history.
• Identify red flags in borrower behavior, helping to identify potential fraudsters.
• Generate a ready-to-use digital credit score, based on which a lender can make an informed decision on whether to grant a loan or create a personalized offer.

With the RiskSeal platform, you can tap into emerging markets and minimize existing risks.