Fintechs — either on their own or in partnership with banks — are clarifying misconceptions surrounding alternative data, from its perception to real-life benefits.
Understanding the definition of alternative data is critical to understanding the technology’s application.
Fintechs have expanded access to credit not by reinventing the wheel when it comes to credit scoring, but by revolutionizing it.
The “new” data taken into account by these algorithms has always existed. But fintechs have simply found a way to optimize this data to better predict a consumer’s ability to make a payment.
The behavior of consumers can be better measured through the use of alternative data. While this is not — and should never be — a determining factor of pricing, it better establishes an individual’s creditworthiness and ability to repay.
The inclusion of this data into proprietary algorithms does not preclude the use of traditional measurements. In reality, alternative data functions merely as supplemental data while simultaneously enabling more consumers to build their credit history.
The status quo has provided fintechs with a reliable starting point. But utilizing additional available information can lead to a more inclusive and resilient financial system. And the evidence is clear.
In August, the Consumer Financial Protection Bureau released statistics from its first so-called No-Action Letter with Upstart Network, a fintech underwriter that has…