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Benefits of alternative credit data for small banks

The positive role that alternative credit data can play in the financial realm - for consumers and lenders alike - is gradually becoming clearer. Yet as is the case with nearly all new methods, especially in the financial arena, not all institutions are taking to the adoption of this new tool like ducks to water. 

"Some smaller banks are hesitant to incorporate alternative credit data into their loan approval processes."

Information Age reported that smaller banks and credit unions, in particular, appear hesitant in many cases to put a great deal of stock in alternative credit data's value.

Reasons differ by institution, but common refrains justifying such stances include the fear of approving borrowers with poor financial histories, as well as a general reticence regarding new methodologies. While understandable, lenders may ultimately be passing up good opportunities due to over-reliance on traditional credit.

Banks eschewing alternative credit - for now 
Per the results of a 2015 survey by TransUnion, only 16 percent of U.S. banks and credit unions augmented the loan underwriting process with the use of alternative credit information. However, the credit bureau's research also identified that when an auto loan firm incorporated nontraditional data into its usual steps of borrower due diligence, approval rates jumped 24 percent

While the financial stakes are considerably greater in mortgages than car loans, such positive examples of alternative data usage could help change bankers' general opinion on the matter.

Traditional credit's large blind spot
Banks' logic in eschewing data centers on the desire to find reliable borrowers, of which good credit is theoretically indicative. But this stance could be ignoring far more applicants than previously believed.

A study conducted by the Center for Financial Services Innovation found that 43 percent of U.S. households experience difficulties making bill and credit payments on time. It also identified almost 60 percent of Americans as "financially struggling."

Small, community-based banks and credit unions can't afford to leave that much business on the table. Incorporating alternative credit model assessments into their lending practices on a regular basis could end up being a considerable boon to these institutions' bottom lines. 

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