3 Ways Lenders Can Utilize Alternative Data [VIDEO]

PLANO, Texas — Using alternative data solely for credit decisions “is a narrow view,” according to Daniel Parry, co-founder and chief executive of Praxis Finance. Lenders can also utilize alternative data to better manage other parts of the business, including in the collections process and to mitigate consumer fraud.

Praxis has tested “virtually all of the sources of alternative data over the years,” Parry told Auto Finance News at the Non-Prime Auto Financing Conference last week. “That gave us a tremendous lift over just using traditional credit bureau data alone.”

Lenders have “a number of problems that don’t relate to credit scores,” he said, which ultimately gives way to “an infinite number of reasons for data.” Some areas where alternative data can be utilized include:

• Collections

Lenders can utilize alternative data “to predict which customers positively respond to collections calls,” Parry said. “I can build a model on the data so I am sure to prioritize calls to all the high likelihood customers.”

• Identifying Good and Bad Behavior

Alternative data can help lenders separate a consumer’s good and bad behavior. For example, a “bad event” could be a repossession, and a “good event” could be a payoff, Parry said. “I know from credit data that the more bills a customer pays and the longer they have been in the credit file, the more likely they are to end up in the good category,” he said. “Conversely, the more delinquency and bad debt they have, the more likely to end up in the bad category. I can build a model that ranks each consumer from best to worst and use it to make credit decisions.”

• Consumer Fraud

Instead of wondering if the consumer will pay off the loan, lenders can test the data to see if it helps spot fraud, Parry explained. If a customer defaults within the first three payments, often those early pay defaults will be accompanied by information where the customer is found to either not be the one driving the car, the person doesn’t even have a job (documents were falsified), or the dealer misrepresented something. “I can look at the alternative data at the time of application and see how well the data does at separating good and bad results,” which helps mitigate fraud and determine consumer behavior across the credit spectrum.

Check out Parry’s discussion of the many uses and importance of alternative data in the video below.