Solving the Credit Conundrum: Using Alternative Data to Better Understand “Elusive” Market Segments

October 23, 2017 Yolanda Thomas

It’s a conundrum for many service providers in the utility, pay TV and communications sectors when it comes to assessing consumer risk. You want to tap into the unbanked and underbanked markets and those consumers who lack traditional credit file history. The most puzzling part is effectively assessing if they’ll pay their bills. As a result, you constantly balance the financial risk with the opportunity to grow, and struggle to keep financial exposure, losses and bad debt in check. There has to be a better solution.

The answer: alternative data. This can make a difference!

Financial data (traditional credit) vs. non-financial data (alternative data)

Let’s begin with financial account and payment data, which is included in traditional credit files for things like credit cards, mortgages, student loans and more. It’s the foundation of most credit-based account relationships, since it can show: 1) whether a consumer has any existing credit balances or history of balances; and 2) how the consumer is managing that credit. As we all know, it’s highly predictive of how a consumer will handle future financial obligations.

Then there’s non-financial payment data, and this is where the category of alternative data begins. Different companies offer various types of alternative data, but it’s usually a type of account payment data that is generally not reported to the credit bureaus.

Alternative data solutions reveal how people pay their everyday bills— like utilities, pay TV and cell phones. Since the vast majority of U.S. consumers have these basic services, the data coverage is comprehensive, and highly predictive of future account performance within the utility, pay TV and communications industry, since it shows how customers pay other similar providers.

More data is better

Research shows that up to 26 million adults don’t have a credit file on record at the top three credit reporting agencies1. This represents roughly 10.4% of the U.S. adult population (249 million). For these consumers, evaluating risk by relying exclusively on traditional credit data simply isn’t ideal, since they lack credit files or their number of tradelines is negligible.

This is where alternative data changes everything. With alternative data suddenly you gain visibility into millions of hidden or previously “off-limits” market segments. These elusive consumer segments that had not shown up on the credit radar initially are now clearly visible. By understanding how these people pay similar service providers, you can better predict how they’ll pay you. If they always pay other providers on time, why should you be any different? The same goes for slow payments and delinquency.

Here’s the bottom line. The more data you have that includes credit and alternative data, the better you can:

  • Understand and serve a much wider audience of customers
  • More accurately classify all customers based on risk
  • Set more appropriate risk-based deposits that help reduce losses
  • Offer more personalized offers and customer experiences
Understand more and grow more with an expanded view

Enhancing the account opening process to include both financial and non-financial trade information, like alternative data, can give you the expanded depth, breadth and coverage you need to better serve more customers—including those with and without credit files. You’ll see how they manage their credit, and how they handle everyday bills not included on the credit report. By better understanding the potential risk associated with them, you can make more informed decisions and set more personalized deposit and service limits that will help you confidently grow your customer base, without increasing your financial exposure.

Watch this video on a unique alternative data solution for the utility, pay TV and communications industries at http://www.nctue.com/nctue-overview.

 

 

1https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/BecomingCreditVisible_Data_Point_Final.pdf

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