Alternative data

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 [ [http://www.cgap.org/p/site/c/template.rc/1.26.2144 CGAP, Alternative Data to Develop a Credit Score] ] .

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 electricity, gas, and heating oil)
* Telecommunications bills (such as land lines and mobile phones)
* Rental payments
* Electronic payments (remittances, withdrawals, transfers, etc)

Research by PERC suggests that utility and telecom payments are most accurate at scoring individuals [ [http://infopolicy.org/pdf/alt-data.pdf Turner, Michael et al. "Give Credit Where Credit Is Due", Political and Economic Research Council, p 11] ] .

Alternative data in the United States

In the United States, 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 [ [http://www.boston.com/business/personalfinance/articles/2006/05/21/verizons_free_gift_to_customers_giving_payment_data_to_credit_bureaus/ Boston Globe, Verizon's 'free gift' to customers: Giving payment data to credit bureaus] ] . If illegal immigrants in the United States are included, that number exceeds 70 million [ [http://www.google.com/url?sa=t&source=web&ct=res&cd=3&url=http%3A%2F%2Fwww.prbc.com%2Fpub%2FPRBC_NCRA_Press_Release_051003.pdf&ei=2I_KSMusGpyg8wTghryYDQ&usg=AFQjCNFiuiWZOwZw0XYAhFyMKskmDGUzOw&sig2=9C5zOCNZYIUCB09SLJt_Pg National Credit Reporting Association Press Release] ] . 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 [ [http://infopolicy.org/pdf/alt-data.pdf Give Credit Where Credit Is Due] ] . 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 [ [http://infopolicy.org/pdf/YouScore.pdf You Score, You Win] ] . Racial minorities, women, and the poor disproportionally benefit [ [http://infopolicy.org/pdf/alt-data.pdf Turner, Michael A et al, "Give Credit Where Credit Is Due", Political and Economic Research Council, 3.] ] . Furthermore, loans become smarter. Including alternative data has little effect on the credit mainstream, those already scorable in the current system.fact|date=September 2008 Furthermore, this increase in data actually decreases the number of bad loans.fact|date=September 2008

Current use of alternative data

Utilities and telecoms firms in several states have started reporting their data to CRAs. PRBC, 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 [ [http://www.businessweek.com/magazine/content/08_16/b4080052299512.htm?chan=search Levisohn, Ben, "The Credit Rating in Your Shoebox," "Business Week"] ] . TransUnion, First American CredCo, and LexisNexis 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 Agenciess [ [http://www.consumerfed.org%2Fpdfs%2FRegulatory_Relief_ILCs_Senate_Testimony031506.pdf&ei=AJbKSJDuCpyS8wTXiZygDQ&usg=AFQjCNHSorVNMXkzasdiaAbZD7WEhCMCgw&sig2=4lnNvUTIfEyj0ti_b4dmYw Margot Saunders, Testimony before Congress, 1 Mar 2006] ] . 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 [ [http://www.infopolicy.org/pdf/YouScore.pdf Turner, Michael A, Alyssa Lee, et al. "You Score You Win", Political and Economic Research Council, p 17, Chart 2.] ] .

Alternative data in low-income countries

In low-income nations, 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 [ [http://www.cgap.org/p/site/c/template.rc/1.26.2144 The World Bank, Consultative Group to Assist the Poor] ] .

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 the mainstream credit system. An especially promising option is the full reporting of trade credit data, such as records from cash and carry warehouses [ [http://www.infopolicy.org/_working/files/downloads/South-Africa-compressed-web.pdf Turner, Michael, Robin Varghese, et al. "Information Sharing and SMME Financing in South Africa", Political and Economic Research Council (PERC), p58.] ] .

References

ee also

* Political and Economic Research Council
* PRBC

External links

* [http://www.infopolicy.org Political and Economic Research Council]