Alternative data
Encyclopedia
In economic policy
, alternative data refers to the inclusion of non-financial payment reporting data in credit files
, such as telecom and energy utility payments. Only 39 of 178 economies (22 percent) have credit bureaus that currently track alternative data.
PERC
is the primary thought leader in this field, having conducted multiple studies on alternative data. PERC
proposes that mainstream lenders use "alternative" or "nontraditional" data, including payment obligations such as rent, gas, electric, insurance, and other recurring obligations to evaluate the risk profile of potential borrowers.
Research by PERC
suggests that utility and telecom payments are most accurate at scoring individuals.
, credit files
include negative information, such as delinquencies as well as positive information, like repayment of debts. Still, an estimated 35 to 54 million Americans have insufficient credit information to qualify for mainstream credit. If immigrants in the United States are included, that number exceeds 70 million. Access to credit is thus a Catch-22
for many poorer Americans—one needs credit to get credit. Research suggests that the inclusion of alternative data in credit files could bring many of these individuals into the credit fold. That is, non-financial positive payment information, like rents or utility payments, can give credit agencies enough information to rate previously unscorable individuals known as the unbanked. These newly-scored individuals have risk profiles similar to those already in the mainstream credit system. Racial minorities, women, and the poor disproportionally benefit. Furthermore, loans become smarter. Including alternative data has little effect on the credit mainstream, those already scorable in the current system. Furthermore, this increase in data actually decreases the number of bad loans
Experian purchased RentBureau in June 2010, which houses rental payment histories on over 7 million US residents, this data will now be included in consumer credit reports as of January, 2011. This will benefit those that overlap with the 50 million US underbanked consumers. The danger with this, is that it will provide a further variable to damage credit scores of those that do not for example manage their rental payments on time in addition to their other credit arrangements
, a consumer credit reporting agency based in Annapolis, Maryland
, allows consumers to self-enroll and build a positive credit file based on their timely payments for bills such as rent, utilities, cable, telephone, and insurance that are not automatically reported to the other bureaus. TransUnion
, First American CredCo, and LexisNexis
have all recently released products involving alternative data.
. There are concerns that state and local incentives to not pay bills on time (for example, some states provide heating oil subsidies if payments are missed) may cause deterioration in credit scores over time. There is also concern that people who open accounts with only alternative data will become over-extended. Recent research shows, however, that the inclusion of alternative data does not degrade credit scores over a one year period.
, alternative data is often the only type of data available for credit scoring. The population is often not formally employed, lacks a credit history, cannot fulfill loan application requirements, and has insufficient capital. Even when these requirements are fulfilled, lending institutions often have very little experience with clients’ economic activity leading to untailored loan products.
Alternative data can circumvent all these issues. Gathering this data through microfinance institutions, however, is labor and time intensive, resulting in high interest rates.
Electronically available alternative data, such as bill payments, mobile phone bills, rental payments, and electronic transaction data, could be used to score these individuals and enter millions in low-income countries into a more modern credit ratings system.
An especially promising option is the full reporting of trade credit
data, such as records from cash and carry
warehouses.
Economic policy
Economic policy refers to the actions that governments take in the economic field. It covers the systems for setting interest rates and government budget as well as the labor market, national ownership, and many other areas of government interventions into the economy.Such policies are often...
, alternative data refers to the inclusion of non-financial payment reporting data in credit files
Credit score (United States)
A credit score in the United States is a number representing the creditworthiness of a person, the likelihood that person will pay his or her debts....
, such as telecom and energy utility payments. Only 39 of 178 economies (22 percent) have credit bureaus that currently track alternative data.
PERC
Political and Economic Research Council
PERC, the Policy and Economic Research Council is a Durham, North Carolina based non-profit, non-partisan think tank that concentrates on market-based economic development, both in the United States and internationally...
is the primary thought leader in this field, having conducted multiple studies on alternative data. PERC
Political and Economic Research Council
PERC, the Policy and Economic Research Council is a Durham, North Carolina based non-profit, non-partisan think tank that concentrates on market-based economic development, both in the United States and internationally...
proposes that mainstream lenders use "alternative" or "nontraditional" data, including payment obligations such as rent, gas, electric, insurance, and other recurring obligations to evaluate the risk profile of potential borrowers.
Types of alternative data
Alternative data in the broadest sense refers to any non-financial information that can be used to estimate the lending risk of an individual. Information includes:- Utility bills (such as electricityElectricityElectricity is a general term encompassing a variety of phenomena resulting from the presence and flow of electric charge. These include many easily recognizable phenomena, such as lightning, static electricity, and the flow of electrical current in an electrical wire...
, gasGasGas is one of the three classical states of matter . Near absolute zero, a substance exists as a solid. As heat is added to this substance it melts into a liquid at its melting point , boils into a gas at its boiling point, and if heated high enough would enter a plasma state in which the electrons...
, and heating oilHeating oilHeating oil, or oil heat, is a low viscosity, flammable liquid petroleum product used as a fuel for furnaces or boilers in buildings. Home heating oil is often abbreviated as HHO...
) - Telecommunications bills (such as landlineLandlineA landline was originally an overland telegraph wire, as opposed to an undersea cable. Currently, landline refers to a telephone line which travels through a solid medium, either metal wire or optical fibre, as distinguished from a mobile cellular line, where transmission is via radio waves...
s and mobile phones) - Rental payments
- Electronic payments (remittancesRemittancesA remittance is a transfer of money by a foreign worker to his or her home country. Note that in 19th century usage a remittance man was someone exiled overseas and sent an allowance on condition that he not return home....
, withdrawals, transfers, etc.)
Research by PERC
Political and Economic Research Council
PERC, the Policy and Economic Research Council is a Durham, North Carolina based non-profit, non-partisan think tank that concentrates on market-based economic development, both in the United States and internationally...
suggests that utility and telecom payments are most accurate at scoring individuals.
United States
In the United StatesUnited States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
, credit files
Credit score (United States)
A credit score in the United States is a number representing the creditworthiness of a person, the likelihood that person will pay his or her debts....
include negative information, such as delinquencies as well as positive information, like repayment of debts. Still, an estimated 35 to 54 million Americans have insufficient credit information to qualify for mainstream credit. If immigrants in the United States are included, that number exceeds 70 million. Access to credit is thus a Catch-22
Catch-22
Catch-22 is a satirical, historical novel by the American author Joseph Heller. He began writing it in 1953, and the novel was first published in 1961. It is set during World War II in 1943 and is frequently cited as one of the great literary works of the twentieth century...
for many poorer Americans—one needs credit to get credit. Research suggests that the inclusion of alternative data in credit files could bring many of these individuals into the credit fold. That is, non-financial positive payment information, like rents or utility payments, can give credit agencies enough information to rate previously unscorable individuals known as the unbanked. These newly-scored individuals have risk profiles similar to those already in the mainstream credit system. Racial minorities, women, and the poor disproportionally benefit. Furthermore, loans become smarter. Including alternative data has little effect on the credit mainstream, those already scorable in the current system. Furthermore, this increase in data actually decreases the number of bad loans
Experian purchased RentBureau in June 2010, which houses rental payment histories on over 7 million US residents, this data will now be included in consumer credit reports as of January, 2011. This will benefit those that overlap with the 50 million US underbanked consumers. The danger with this, is that it will provide a further variable to damage credit scores of those that do not for example manage their rental payments on time in addition to their other credit arrangements
Current use of alternative data
Utilities and telecoms firms in several states have started reporting their data to CRAs. PRBCPrbc
PRBC is a consumer credit reporting agency, more commonly referred to as a credit bureau in the United States. It is similar to the other four U.S. credit bureaus in that it is an FCRA compliant national data repository. However, PRBC differs in a few distinct ways...
, a consumer credit reporting agency based in Annapolis, Maryland
Annapolis, Maryland
Annapolis is the capital of the U.S. state of Maryland, as well as the county seat of Anne Arundel County. It had a population of 38,394 at the 2010 census and is situated on the Chesapeake Bay at the mouth of the Severn River, south of Baltimore and about east of Washington, D.C. Annapolis is...
, allows consumers to self-enroll and build a positive credit file based on their timely payments for bills such as rent, utilities, cable, telephone, and insurance that are not automatically reported to the other bureaus. TransUnion
TransUnion
TransUnion is the third largest credit bureau in the United States, which offers credit-related information to potential creditors. Like major competitors Equifax and Experian, TransUnion markets credit reports directly to consumers.- History :...
, First American CredCo, and LexisNexis
LexisNexis
LexisNexis Group is a company providing computer-assisted legal research services. In 2006 it had the world's largest electronic database for legal and public-records related information...
have all recently released products involving alternative data.
Concerns about the use of alternative data in credit files
Some concerns about the use of alternative data have been raised over the long-term consequences of fully reporting utility and telecom payments to Credit Rating AgenciesCredit rating agency
A Credit rating agency is a company that assigns credit ratings for issuers of certain types of debt obligations as well as the debt instruments themselves...
. There are concerns that state and local incentives to not pay bills on time (for example, some states provide heating oil subsidies if payments are missed) may cause deterioration in credit scores over time. There is also concern that people who open accounts with only alternative data will become over-extended. Recent research shows, however, that the inclusion of alternative data does not degrade credit scores over a one year period.
Alternative data in low-income countries
In low-income nationsDeveloping country
A developing country, also known as a less-developed country, is a nation with a low level of material well-being. Since no single definition of the term developing country is recognized internationally, the levels of development may vary widely within so-called developing countries...
, alternative data is often the only type of data available for credit scoring. The population is often not formally employed, lacks a credit history, cannot fulfill loan application requirements, and has insufficient capital. Even when these requirements are fulfilled, lending institutions often have very little experience with clients’ economic activity leading to untailored loan products.
Alternative data can circumvent all these issues. Gathering this data through microfinance institutions, however, is labor and time intensive, resulting in high interest rates.
Electronically available alternative data, such as bill payments, mobile phone bills, rental payments, and electronic transaction data, could be used to score these individuals and enter millions in low-income countries into a more modern credit ratings system.
An especially promising option is the full reporting of trade credit
Trade credit
Trade credit is an arrangement between businesses to buy goods or services on account, that is, without making immediate cash payment. The supplier typically provides the customer with an agreement to bill them later, stipulating a fixed number of days or other date by which the customer should pay...
data, such as records from cash and carry
Cash and carry (wholesale)
Cash and carry wholesale represents a type of operation within the wholesale sector. Its main features are summarized best by the following definitions:...
warehouses.
See also
- Political and Economic Research CouncilPolitical and Economic Research CouncilPERC, the Policy and Economic Research Council is a Durham, North Carolina based non-profit, non-partisan think tank that concentrates on market-based economic development, both in the United States and internationally...
- PRBCPrbcPRBC is a consumer credit reporting agency, more commonly referred to as a credit bureau in the United States. It is similar to the other four U.S. credit bureaus in that it is an FCRA compliant national data repository. However, PRBC differs in a few distinct ways...