Written by: Mike Senecal
Edited by: Lillian Guevara-Castro
Reviewed by: Adam West
Key Takeaways
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The three major U.S. credit bureaus have worked for years to bring products that embrace alternative credit data to market.
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TransUnion's introduction of the TruVision Alternative Bank Risk Score puts the bureaus on a similar heightened playing field where traditional and trended credit data blends with alternative, public, and proprietary sources to form a fuller consumer picture.
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The product's arrival marks another point in a shift by the bureaus toward products that reach out to consumers outside the traditional credit-reporting system.
What makes an excellent subprime lending customer? Often, it’s not the consumer’s record of previous credit use because there isn’t one. If there is, it may record past activity that doesn’t accurately represent the consumer’s current ability to repay.
Those are big reasons why so-called alternative credit data is making inroads in the credit assessment and reporting industry. As digital transformation has made innovation increasingly practicable in financial services over the past decade or more, fintechs with nontraditional approaches to credit assessment are snatching a share from traditional banks, credit unions, and finance company lenders with less expansive visions.
And that’s why Experian, Equifax, and TransUnion, the big three U.S. credit reporting agencies, are increasingly prioritizing alternative assessment models. With the introduction of its TruVision Alternative Bank Risk Score product on February 5, TransUnion joins Experian (with its Experian Lift Premium product) and Equifax (with its OneScore product) at the forefront of the market’s evolution toward fully fledged scoring models that take much more than a person’s past credit history into account.
The U.S. credit bureaus are committed to expanding the definition of creditworthiness through alternative risk data models.
Like the fintechs before them, the bureaus intend these models to expand financial inclusion and the subprime customer base.
TransUnion’s Alternative Bank Score product and the other initiatives from the credit reporting agencies acknowledge that patterns and trends in a consumer’s overall financial and transactional history, such as on-time bill-paying behavior, may be more relevant than a credit report record of a mistake made years ago. Also with a part to play is nonfinancial data, such as information concerning educational attainment and employment history.
These and other types of alternative financial and non-financial data are available for subprime lenders to consider. However, lenders need tools to learn what nontraditional prospective borrowers have to offer, or they will continue to go off in other directions (as some already have).
The bottom line is there are lots of reasons for a lender to say no to a prospective borrower. And none of them result in the consumer accepting the offer. Naturally, many consumers with less-than-stellar credit records are primed and ready to consider any lending opportunity that helps them reach their goals.
The Rise of Alternative Assessment
A January 2022 article published on the website of the global management consulting firm Oliver Wyman (with the data support of Experian) provides recent statistics regarding the extent of the problem of underbanked and unbanked consumers in America.
(The Consumer Financial Protection Board might have more recent stats. But that site is undergoing a profound reorganization. It’s partly down as I write this article on February 12, two days after the government stopped the agency’s activity.)
The Oliver Wyman material reported that 19% of American adults (49 million consumers) had no credit score. About 28 million were “credit invisible,” meaning the bureaus had recorded zero activity speaking to creditworthiness. The other 21 million, the “unscorables,” had some info in their credit files but not enough to generate a score.
Another 57 million individuals were in the subprime category. That identifies more than 100 million consumers as vulnerable to some degree to the vagaries of the credit market.
“In the absence of recent positive history, even a small amount of dated negative information can drag down a person’s score, making it difficult to reestablish credit,” the Oliver Wyman authors noted.
Hence the rise of fintechs. Upstart, for example, has used nontraditional variables to assess credit risk since 2012. In 2018, Petal launched a credit card targeting credit invisibles and thin-file consumers using cash flow underwriting to analyze banking data and spending patterns in lieu of traditional credit scores.
Others have pioneered alternative peer-to-peer structures to help consumers gain an advantage. Fintechs such as Kabbage used real-time business operations data to assess SMB creditworthiness the way others assessed consumers.
Affirm and others are putting energy behind the short-term installment products consumers know as Buy Now, Pay Later loans. Some fintechs have even explored income share agreements (ISAs) and future income-based lending.
Where the Bureaus Stand on Credit Inclusion
It’s been a lot for traditional lenders to take in. Fintechs have gained a significant share in personal loans, BNPL, and alternative credit products, often undercutting banks and credit unions with faster approval times and more flexible underwriting.
I argue that the previous point holds, though recent figures regarding fintech loan-origination penetration have seen the industry trend downward. For example, Experian’s Fintech Trends Report from July 2024 has fintech at a 55% share of the total market for unsecured personal loans in March 2022 but at a 42% share two years later.
But that’s part of an overall downward trend in loan originations, as a chart from the Experian report shows. There’s no reason to assume fintechs are going away until consumers tell them to. Nor should they. Financial technology companies use credit reports in many creative ways, and many rely on them to make most credit decisions. TransUnion and the other bureaus have products that incorporate alternative approaches for all lenders.
Experian instigated the push in 2019 when it introduced Experian Lift to assess consumers with thin or no credit files using rental payments and cash flow analysis. Today, the Experian Lift website asserts that Lift Premium and Lift Plus “leverage expanded FCRA-regulated alternative data and advanced analytics to improve predictive performance across the entire credit spectrum.”
OneScore’s definition of “differentiated alternative data” at Equifax encompasses utility, subscription, and mobile payments.
“Approximately 15 percent more or 6.3 million applicants that are considered subprime, no hit or thin file could be approved for a near-prime or prime offer without increasing risk when OneScore is used in combination with a traditional risk score,” the business claimed.
Now, TransUnion has fleshed out its existing suite of TruVision credit risk scoring products with a tool to evaluate thin- and no-file consumer checking and banking data.
“In addition to helping lenders make more informed decisions, this score can potentially offer some consumers with limited credit histories an alternate pathway to credit, by providing a more comprehensive view of their financial behavior,” the company stated.
