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, while PPP 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 and VA 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 marketing needs.

Data repositories

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.  

• Employment 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 financing services. 
• 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 risk assessment. 

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. 

• Consumer-permissioned 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 economic downturn.

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 resource center.