The use of alternative data by lenders could expand access to credit to more than 40 million consumers. Likewise, banks and credit unions are using alternative data to fight fraud and provide faster access to funds. However, regulatory uncertainty surrounds the use of alternative data in making lending decisions, according to the U.S. House Committee on Financial Services’ Task Force on Financial Technology.
On top of that, cybersecurity concerns and discriminatory lending are raising red flags when it comes to alt-data usage. “We don’t want over-regulation to stifle innovation,” said Rep. Stephen F. Lynch (D-Mass.), chairman of the task force. “Alternative data has allowed lenders to have a more holistic view of the consumers they serve.”
Despite the potential benefits of alternative data, its use in financial services can pose risks and lack “transparency” for the consumer, Lynch said. For instance, some lenders may not lend to consumers based on whom they associate with on social media.