Alternative Data Sheds New Light on Alternative Lending for Credit Unions

Consumers needing a loan, resort to conventional lending products through traditional financial institutions. But what happens to them when FIs evaluate these prospects as risky? They resort to alternative loans from non-bank lenders.  In today’s trying times with a rapid spread of pandemic, more and more consumers are facing financial difficulties and will need funds. The market for alternative loans is bound to grow in coming months.

Like other traditional lending institutions, credit unions also offer few alternative products to members who for various reasons, don’t qualify for conventional loans. Most see the proposition as too risky. But, armed with the right information, it becomes clearer that the perceived risk is obscuring real rewards – for both CUs and their members.

Tapping into an Underserved Market

Often demographic, member account, and bureau data dominate lending decisions – and historically, this approach served Chief Lending Officers well. But today, this traditional approach is outdated, and may be automatically filtering out sound opportunities.

There’s a large segment of people whose credit needs are unfulfilled because they don’t meet the criteria for traditional lending products. This population of potential borrowers often consists of millennials, new graduates with little employment history, migrants with secured jobs, inactive cardholders or anyone lacking debt/ borrowing history. People with “thin” credit files represent about 20% of borrowers, and they are often unbanked or underbanked.

For these individuals, alternative lending products such as payday loans or short-term small and medium personal loans represent a vital financial lifeline. But credit unions have little that can meet their needs.

For CUs that want to reach untapped segments of borrowers, a world of alternative data is emerging that offers rich and undiscovered insights. CUs can more safely extend credit and provide a second chance to these underserved financial consumers.

Using an Alternative  Data-Driven Approach

Alternative data can help credit unions look at alternative lending from a new perspective. CU Rise analysis has shown many credit unions are rejecting loan applications that could become new revenue sources with a risk-managed approach. Underwriting and pricing policies can be made more rigorous and effective when backed by analytical data.

An alternative data analytics-driven approach harnesses unconventional data sources for a more holistic assessment of credit-worthiness. In addition to traditional credit bureau reports, valuable information can be gleaned from sources like mobile, ACH, ERIC, Statement, app data, social media, transaction data, and payment data.

As credit unions continue to modernize and adapt, they can find inspiration and useful practices employed by the fintech community. One such company uses real-time data input by borrowers to build an initial primary profile, capturing information such demographic, bureau, debt purpose, debt transfer, personal financial information and much more when a borrower registers at their website. After registration, ongoing performance data is collected to determine eligibility for subsequent loans.

The traditional lending market is oversaturated and highly competitive. It’s time for credit unions to take a modern and sophisticated approach to new lending opportunities. Don’t limit your potential to iterating new versions of the same old products. Consider how alternative lending can smartly open new doors for you and underserved members.