Updated 5/11/2023: The
White House declared the end of the Covid-19 Health Emergency May 11,
2023 so some of the details mentioned in this article regarding the
CARES Act or pandemic may have changed.
The impact of the COVID-19 pandemic can be felt in many
areas – from the record high unemployment rate to companies across
various industries struggling to keep their heads above water. As
consumers and businesses struggle to recover from job losses and
declining sales, alternative data plays an increasingly important
part in the recovery process.
Now more than ever, alternative data solutions can help
solve some of the banking and lending industry’s most significant
challenges. In our recent webinar, Market
Pulse: Challenging Economic Times Elevate the Need for Alternative
Data, we discussed the emergence of alternative data sources. In
this blog, we’ll delve further into how alternative data sources are
used and how to choose the right ones.
Economic conditions impact business and consumer lending
COVID-19 has resulted in a non-traditional economic
recession, raising the need for new recovery strategies. Economic
impacts escalated quickly as countries and states implemented
shelter-in-place orders, and the resulting unemployment rates
followed quickly. As a result, the federal government and financial
institutions have focused on softening the blow of the impending
recession on small businesses through the Paycheck
Protection Plan (PPP) to support struggling businesses.
To offer relief to consumers, a provision in the
government’s coronavirus stimulus package enables borrowers to defer
their debt payments. It requires lenders to hold on reporting these
forbearance activities as “late” to credit reporting agencies from
March to May. This has led to a temporary credit
blind spot for lenders. As the economic downturn continues,
banks and lenders will increasingly feel the brunt of the crisis. With
high unemployment and PPP ending, rough times are ahead for consumers
and small businesses. This will lead to increasing household financial
instability. Banks and lenders can expect to see a rise in delinquency
rates and a decline in loan applications due to consumers’ temporary
inability to make payments.
Alternative data can help address current business challenges
With the creation of The CARES
Act and the PPP, operational challenges have been substantial due
to an influx of new loan applications after the program’s launch. Two-thirds
of small businesses in the U.S. applied for PPP
loan forgiveness for payroll, rent and utility expenses.
Meanwhile, face-to-face interactions are limited during the pandemic,
loan processes remain document-intensive, making the program a
magnet for fraudsters.
Using alternative data to capture the
required information electronically from credible
sources would minimize fraud and eliminate manual
document collection processes.
In addition to PPP loan requirements, FHA
mortgage loans also depend heavily on document verification. These
loans require the borrower to live at the property as their primary
residence for a year. As consumers jump to refinance mortgages
at low rates, lenders will need to meet higher demand for proof
of occupancy verification quickly. Utility data is an alternative data
source that can help verify a consumer's stated address. “We’ve seen
acceleration in the movement to digital lending processes,” said Urjanet SVP of Corporate Development
Erik Becker. “We have one of the largest FHA
mortgage lenders in the country using us to capture utility
invoices to verify addresses.”
In the future, lenders will continue to see the effects of
the pandemic on consumer credit. Loan forbearances and payment
arrangements will lead to inconsistencies in credit histories –
impacting the credit assessment process. Traditional data will provide
a limited view of a borrower’s ability to pay, amplifying
the need for additional alternative data sources.
A wealth of alternative data sources are available
Alternative data provides a broader view of consumers to
help lenders make better decisions. More frequent account reviews
can help lenders stay abreast of changing risk levels.
“Alternative data gives a more
holistic view of the consumer," said Equifax Risk
Solutions leader Jennifer Cox. "And that includes what
is happening outside their credit file.”
Two forms of alternative data sources that can help business
with fraud prevention, credit risk assessment, collections and
These databases that contain large amounts of stored data.
This data is updated based on predetermined frequencies, and
requests can be made to retrieve information on demand.
data enables lenders to verify employment and income
information against a database of information contributed by
thousands of small to large employers. Automated access to this
data eliminates manual paystub and W-2 collection and helps
streamline loan application processes.
- Specialty finance data
helps lenders expand credit access and broaden financial inclusion
for more consumers. This information is particularly helpful during
an economic downturn. In fact, some consumers may rely on
alternative financing when they no longer qualify for traditional
- Utility data from NCTUE is
another type of alternative data that helps expand credit access and
broaden financial inclusion for consumers. Many creditworthy
consumers with thin credit files also have utility, telecom and
payTV payment history. These sources can be used to augment credit
Consumer-permissioned data sources
These sources enable lenders to access account-level data in
real time with consumer consent. They can access information
available from a variety of online accounts, including financial and
other service providers.
bank transaction data is used by lenders to gain visibility
into spending behavior and patterns. This data provides the
insights needed to assess credit risk, develop personalized
offers, and monitor financial wellness.
- Consumer-permissioned utility
data accessed with consumer consent provides insight into
the most recent 12 months of payment history from electric, natural
gas, telecom, cable and water service providers. Ready access to
consumer or small business online accounts enables lenders to verify
identities, enhance credit risk assessment and automate processes
involving manual utility bill collection.
What should lenders do next?
So, where does all this leave lenders? Before jumping into
acquiring alternative data, lenders must first focus on the business
problems they are trying to solve. A lender can then identify the data
sources that best align with their business challenges and customer
segments. As the country recovers, lenders should keep in mind the
importance of alternative data. “There are multiple data sources
available that can help you fill the gaps and keep pace with the
changes in the economy,” Cox said. Lenders should brace for long-term
recovery, given the unique set of circumstances that have caused the
Alternative data will help to provide additional insights
and automated access to help improve decision-making and streamline
internal processes. To help develop or refine your business recovery
strategies, visit our COVID-19