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The Certificate in SME Lending and Alternative Data (CSME) provides you, as a lending relationship manager, credit officer or small business customer adviser with a thorough understanding of lending procedures to small and medium sized enterprises (SMEs); the types and use of alternative data and the practices and legislation affecting lending. By implementing alternative data and CRM tools, marketers can create signals to indicate potential opportunities and forecast the needs of their database contacts. A well-designed compliance management program includes appropriate controls, monitoring, and testing to mitigate and address consumer protection risks. Including alternative data in lending decisions could potentially open up credit opportunities to the tens of millions of Americans with thin to nonexistent credit histories, says Chi Chi Wu, an . Alternative data steadily building momentum in lending International Data Corporation estimates that the global artificial intelligence (AI) market (including software, hardware and services) will grow 16% y/y to USD327bn in 2021 and USD500bn by 2024. In fact, using alternative data is no longer just a benevolent option for banks; they are increasingly feeling compelled to do so because their fintech competitors are aggressively leveraging it for business expansion. These new lenders are also often providing more transparent, faster, easier, and better-tailored financing solutions that today's increasingly tech-savvy SMEs seek. That's because banks often require prospective lenders to show consistent cash flow . Modeling, alternative data, AI help lenders in pandemic. In the consumer financial marketplace, alternative data refers to information used to evaluate creditworthiness that is not usually part of a credit report. Alternative data is also being used to provide granularity on customer preferences and behaviors, which can help in designing new financial products and services. Alternative data is slowly picking up pace in India's lending industry but lenders are yet to explore fully. 2 Our latest e-book explores how alternative data is helping lenders overcome the persistent performance gaps of traditional scoring models. Application of Alternative Data in Credit Decisioning, April 2018 20 Alternative Data Improve Default Prediction, More So for Small Firms Tradeline + peer EDF Gini Coefficient range = ~40% + Financials Gini Coefficient range = 55-60% + Loan payment information Gini Coefficient range = 62-67% Social media information / Location Score You can find all the articles on our trendline. 4 Some types of alternative data and approaches to using it are helpful or promising, but others are harmful or pose risks. Alternative data can be loosely defined as financial information that isn't typically collected by credit reporting agencies or usually provided by customers while seeking credit. "Traditional data" includes loan or credit limit information, repayment history, account status, income, length of time in residence and information from public records such as tax liens or bankruptcies. Alternative lenders can use this data to fill the gap in the lending market. In traditional markets, alternative data can be utility data, such as telecom data. It is expected to reach $8.98 billion in 2025. In addition, for the same risk of default, consumers pay smaller spreads on loans from LendingClub than from credit card borrowing. Alternative data-powered machine learning modelling for digital lending Published on February 8, 2022 by Mrinal Shankar Introduction The two most common challenges banks face in acquiring new customers for lending products are the following: Finding potential borrowers for lending products at lower marketing spending loans. The broad categories of alternative data are below: Certificate in SME Lending and Alternative Data (CSME) The Certificate in SME Lending and Alternative Data (CSME) provides you, as a lending relationship manager, credit officer or small business customer adviser with a thorough understanding of lending procedures to small and medium sized enterprises (SMEs); the types and use of alternative data and the practices and legislation affecting . It covers a wide spectrum of sources ranging from bank account cash flow analysis, credit card usage patterns to non-banking financial facts such as payday loans . Upstart . We have urged a cautious and thoughtful approach in developing solutions. Lenders also benefit from reduced processing costs and more efficient use of resources to focus on tasks that truly require underwriting expertise. The unbanked population gaining access to credit is a substantial reason for fintechs to use alternative data, and another reason is for small businesses to access lending. As per the International Committee on Credit Reporting (ICCR), alternative data is about collecting and analyzing data to determine creditworthiness based on available digital information. 2 Please see Glossary for definition. Alternative data and risk assessment platform NinjaEdge announced today a new partnership with Infinity Software, the leading loan management software provider for alternative credit lenders in . According to a 2018 study by the trade group AlternativeData.org, investment firms spent $373 million acquiring data sets and hiring employees to analyze them in 2017, which was a 60% increase from the year before.The group's latest estimates peg the alternative data market driving over $1 billion in spending this year, and growing to $1.7 . "For lenders, the primary benefit of alternative data is the increased number of profitable loans to be made consistent with a given risk appetite. For those who aren't familiar, P2P lending is the idea that a retail investor can . The global alternative data market shows exponential growth from $1.70 billion in 2020 to $2.41 billion in 2021. Policy makers want to drive innovation for them through the increased use of alternative data and open banking. Leveraging metrics, like credit scores and social media activity, P2P platforms can link borrowers to lenders at suitable interest rates. The combination of alternative credit data, automation, and decision rules enables a consistent process for quickly delivering data-driven decisions that reduce lending risk. As we saw, 24% of these consumers are unscorable using traditional credit scores. fore, this report focuses broadly on digital data for SME lending which includes new uses of both traditional data (bank, accounting, transac-tional, and sales data) as well as alternative data (online ranking and social media, mobile, and individual data, such as psychometric testing). Alternative data provides a broader view of consumers to help lenders make better decisions. Peer-to-Peer (P2P) loan Peer-to-Peer loans - one of the most popular forms of alternative lending - bring together a borrower, an investor, and a partner bank through an online platform. Some examples include: Rent payments Mobile phone payments Cable TV payments Bank account information, such as deposits, withdrawals or transfers Data as of March 31, 2021. Editor's note: This story is part of a series on the trends that will shape the industry in 2021. A wealth of alternative data sources are available . Keywords: Fintech Lending, Alternative Data, Machine Learning, Algorithm Bias JEL Classification: D14, H52, H81, J24, I23 Suggested Citation: Suggested Citation Lenders' Use of Alternative Data, GAO-19-111, Dec. 2018, at 34. The definition of alternative data can vary across different industry sectors. When lenders consider alternative data as a basis for decision making, they can improve risk assessment while boosting revenue growth, tapping into a vast market of new applicants who have. Download our white paper, written by Velocity Solutions CEO Christopher Leonard, to learn how you can expand your lending and reduce charge offs using alternative data. "TransUnion's alternative data credit score enables Sierra Auto Finance to better assess the creditworthiness of thin-file applicants. We compare loans made by LendingClub and similar loans that were originated by banks. digital platforms that can provide information on consumer activities for credit risk assessment. card, and automobile loans.21 The push for alternative data, then, can be about market competition in the for-profit credit scoring system. Reduce your COA and expand your offers and approvals Financial regulators' recent statement cautiously encouraging banks and credit unions to use alternative data in their lending decisions is a big step forward for the use of nontraditional data and artificial intelligence in loan decisions that could significantly expand credit to those who normally don't qualify, according to bankers and industry representatives. The Ultimate Guide To Alternative Lending In 2021. Traditional data will provide a limited view of a borrower's ability to pay, amplifying the need for additional alternative data sources. Gardineer said that lenders using alternative data "need to be sure what they're looking at are indicators of risk—not race." OCC's Project REACh, a collaboration of business, banking, technology, community, and civil rights leaders, is looking at options for equitably scoring alternative data to expand inclusion, particularly for . Alternative data for credit seems to be the new buzz word for the lending segment, especially for the financial technology (fintech) companies that provide small-ticket loans. The availability of data and the tools to extract deeper insights will also help in other areas of lending - such as differentiated pricing for loans and preferred lending rates. Thanks to Alternative Data, or non-traditional datasets banks have on hand internally, lending institutions can take their evaluation one step further, by analyzing the reputation of both the business requesting the loan and the products and/or services they sell. Ouida Taaffe looks at recent developments in UK and the MENA region and how financial data may be used in future. It also reminds financial institutions to be aware of the relevant consumer protection laws, including, as appropriate, fair lending laws, before using alternative data. "Invisible Primes: Fintech Lending with Alternative Data." Harvard Business School Working Paper, No. Among his first actions as president, Joe Biden signed an executive order to extend the pause on student loan payments through Sept. 30. When you think of alternative lending, the most topical category is peer-to-peer (P2P) or marketplace lending. Smart Lending & Underwriting: Banks turn to Alternative Data for more reliable credit scoring In recent years, more banks and financial institutions are relying on Alternative Data linked to the online reputation of SMEs to more reliably assess risk and make strategic commercial underwriting and lending decisions. Alternative data regarding a client can be obtained from a number of non-traditional data sources- e.g. Conclusion Thoughts and Future Trends for AI in Financial Lending. Date:September 09, 2019 Author(s): Austin Kilgore Report Details: 19 pages, 9 graphics Research Topic(s): Digital Lending; Print PAID CONTENT . Of course, alternative data cannot be a meaningful credit-building tool for SMBs if lenders aren't willing to embrace it. All other data is considered "alternative data." December 14, 2020 12:00 AM. As with so many aspects of credit and financial services, "the devil is in the . The statement acknowledged the broad range of alternative data available to banks, credit unions and non-bank financial firms, which the financial services providers are either using or considering using in their underwriting, fraud detection, marketing, pricing, servicing and account management. GAO analyzed data provided by government-sponsored enterprises and federal agencies for fiscal years The research results are in* 74% of lenders say that they are using additional information outside of the traditional credit report. Take alternative data seriously. Her character is commendable and she is often recommended to other households based on her superior work ethic and integrity. Alternative data replaces the conventional methods like documented credit history for obtaining SME lending. Over the last several years, it's become more and more difficult for small and mid-sized companies to obtain a bank loan — even for businesses with strong financials and a track record of success. Alternative data sources are a key ingredient in the financial services industry. 96% of lenders Branch is one example of a company using alternative data to make lending decisions. Alternative data regarding a client can be obtained from a number of non-traditional data sources- e.g. Meet Sarita, a god-fearing lady of 32, who works as a part-time maid at multiple houses in a certain neighbourhood. A mother of two, Sarita is devoted to providing her children with the . The alternative data space is growing quickly. Before lending out to a customer, lenders can have credit risk management models leverage alternative data to develop credit scores and ensure . We help institutions gain a holistic view of their customer's financial profile, enabling them to make better informed lending decisions. For example, alternative data could increase access to mortgage loans for some borrowers with no or low credit scores, but it could also inadvertently lead to discriminatory lending practices. Alternative data for small business lending. Many traditional lenders are not willing . Using alternative data—such as rental payment history—is an option for mortgage lenders that has benefits and risks. Flexibility in origination strategies is a key component of why . 3 Please see Glossary for definition. For example, VantageScore Solutions, a company created by Experian, Equifax, and Transunion in 2006, applauded the Credit Score Deloitte Research estimates that 50%. Find out how one lender experienced a 45% increased their ability to rank-order risk and learn how alternative data extends the ability to assess emerging markets like millennials and immigrants, part of the . A report released last year by the Government Accountability Office on the use of alternative data by newer online lenders suggested regulators offer more guidance on how alternative data can be . Di Maggio, Marco, Dimuthu Ratnadiwakara, and Don Carmichael. Additional benefits may include reduced transaction costs (additional borrower information could reduce the need for manual processes) and lower aggregate credit losses for any cut-off defined by . One of the most essential characteristics of Smart Lending is to refine and make risk assessment algorithms faster and more effective. Alternative data enables banks to make informed decisions and helps the credit invisibles to join mainstream financial ecosystem. While five or six years ago alternative data was of most interest to niche lenders, he says, many mainstream lenders have been looking at this strategy in order to make more loans to a broader spectrum of borrowers. The Board of Governors of the Federal Reserve System, the Consumer Financial Protection Bureau, the Federal Deposit Insurance Corporation, the National Credit Union Administration and the Office of the Comptroller of the Currency are aware of a broad range of alternative data that bank and non-bank financial firms are either using or contemplating for use. Our latest e-book explores how alternative data is helping lenders overcome the persistent performance gaps of traditional scoring models. Lenders using new kinds of data to evaluate borrowers. The use of alternative data sources, big data and machine learning (ML) technology, and other complex artificial intelligence (AI) algorithms could also reduce the cost of making credit decisions and/or credit monitoring and lower operating cost s for lenders. 5 "The Hourglass Effect: A Decade of Displacement," QED Investors, Frank Rotman, April 13, 2015 Find out how one lender experienced a 45% increased their ability to rank-order risk and learn how alternative data extends the ability to assess emerging markets like millennials and immigrants, part of the . The World Bank Group has analysed 800+ innovative digital SME lenders in 60 countries (58) to find out how alternative data can be used to solve the SME financing gap. Fintech lenders could potentially pass the benefits onto borrowers. The correlations between the rating grades (assigned by LendingClub) and the borrowers' FICO scores declined from about 80% (for loans originated in 2007) to about 35% for . Algo360 is revolutionizing digital lending and credit risk management by bringing alternate data and machine learning together. However, using RiskView score, the unscorable rates are much lower. As an example, the Lending Club originates some of its loans through WebBank. With automation, this data and these tools can provide a visible pipeline to sales teams for follow up online and offline. Invisible Primes: Fintech Lending with Alternative Data: MarcoDiMaggio: y,DimuthuRatnadiwakara z,DonCarmichael § . Alternative data are also useful for traditional lenders; banks may seek to leverage alternative data, such as information from utilities or retail lending, to reach new customer segments including micro "The alternative data landscape is only going to grow over time," says Eric Haller, EVP & Global Head of Experian DataLabs. Many people might not feel comfortable with a company having access to all of this sensitive information about their life. Alternative data transforming SME financing. The rise of alternative lending. Near-Prime Lending: The Role of Alternative Data and AI Near-Prime Lending: The Role of Alternative Data and AI . that these alternative lenders may find it advantageous to partner with banking institutions to originate loans through traditional banks. The report titled " Alternative Data Transforming SME Finance " looked at 800+ innovative digital SME lenders and digital commerce, payments and service providers in more than . The use of machine learning to analyze alternative data in loans and credit rating is going to raise some privacy, ethical, and legal concerns. Using alternative data, credit bureaus, lenders, and fintechs can unlock new opportunities for themselves and the underserved markets they serve. There have been concerns about the use of alternative data sources by fintech lenders. Alternative data is seen by some as a way of filling the information gap and helping lenders determine if their clients will be in a good financial position after the pandemic. De-jargoend: Alternative data in lending Monday, May 01, 2017 0 40. Credit reporting service providers have also begun adopting alternative data for credit worthiness evaluation. Alternative data and risk assessment platform NinjaEdge announced today a new partnership with Infinity Software, the leading loan management software provider for alternative credit lenders in . Don Carmichael . mortgage loans were originated alternative data in fiscal years 2016-2020, (2) potential benefits and risks associated with using alternative data in such lending, and (3) efforts to lenders' use of alternative data. In today's digitally native world, lenders can fasten the entire digital lending . Examples of alternative data sets include credit card transaction data, mobile device data, IoT sensor data, satellite imagery, social media sentiment, product reviews, weather data, web traffic, app usage and ESG (environmental, social and corporate governance) data. 1 Source: AIP Alternative Lending Group. Alternative data can be as simple as a customer's history with a lender. Jackie Charniga. Alternative credit data, fair lending may take focus under Biden. These new lenders are also often providing more transparent, faster, easier, and better-tailored financing solutions that today's increasingly tech-savvy SMEs seek. The report titled " Alternative Data Transforming SME Finance " looked at 800+ innovative digital SME lenders and digital commerce, payments and service providers in more than . Alternative Data and Fair Lending Alternative Data Highlights Credit Risk for the Entire Sample The full results for the total sample can be found in the below figures. Consumers can gain better access to credit, while lenders can make more informed credit decisions. Other examples include cash flow variability, social media metrics, and information related to rental data, cellphone payment history, and other publicly available records. The company offers small loans in Kenya, Tanzania, Nigeria and Mexico, without relying on applicants' credit reports or scores — in fact, many of these applicants have neither. Data analytics, along with alternative data will play a massive role in the lending process moving forward. 2 Alternative Data for Lending Secondary Lending: A look at using predictive data in modern lending Discover how our new TrackStar REVELAR 2.0 solution analyzes your data to uncover new potential -- reducing financial volatility, mitigating risks, and ultimately creating new revenue streams. A rapidly growing group of technology-focused SME lenders are putting the use of SME digital data, customer needs, and advanced . The use of alternative data has allowed some borrowers who would have been classified as subprime by traditional criteria to be slotted into "better" loan grades, which allowed them to get lower priced credit. More SMEs used fintech services in 2020 than ever before. Recent regulations *"Alternative Credit Data" refers to the use of alternative data and its appropriate use in consumer credit lending decisions, as regulated by the Fair Credit Reporting Act (FCRA). While the alternative data sources and the algorithms used by online alternative lenders have Accessed April 19, 2021. Share on Facebook 4 Source: dv01, a provider of standardized loan- level data. 22-024, October 2021. AUTOMOTIVE NEWS ILLUSTRATION. Alternative data such as utility payment history, payroll data and POS transactions have been used by Fintechs to assess loan candidates with such success that traditional banks have begun taking . Alternative data refers to non-traditional data sets that investors use to guide investment strategy. Small-to-medium sized businesses (SMEs) face a finance gap of $2.9 trillion annually. Download white paper now. Alternative data and SME lending: know your customer. We found that a majority of thin-file applicants have previously used alternative credit products, but a majority of these loans are not reported to traditional credit bureaus. Lending with Alternative Data: Marco Di Maggio : Harvard Business School : Dimuthu Ratnadiwakara : Louisiana State University . digital platforms that can provide information on consumer activities for credit risk assessment. Before lending out to a customer, lenders can have credit risk management models leverage alternative data to develop credit scores and ensure . And social media activity, P2P platforms can link borrowers to lenders at suitable interest rates as saw. 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