Alternative data is proving to be a game-changer in achieving financial inclusion in the region. Since it complements traditional credit scoring methods, alternative data helps lenders and other financial institutions reach more borrowers in underserved markets.

 

We have seen in the previous article how data in a traditional credit lending system is differentiated from alternative credit data. This next part of the series will focus on how organisations can benefit from non-traditional data and highlight how it can be used beyond credit scoring and reporting.

 

To recap, alternative credit data refers to the information on a customer’s identity and creditworthiness that is not normally part of the traditional credit reporting process. Banks and other financial institutions, in turn, use these credit reports as the basis for their credit lending decisions.

 

However, since credit bureaus are in different stages of maturity across Asia, it is difficult for banks and other lenders to assess one’s creditworthiness using traditional data alone.

 

Alternative data, on the other hand, may be gathered from non-traditional sources such as telecom and utility companies. From there, lenders can gain insight about one’s identity or payment behaviour.

 

This added visibility gives lenders an opportunity to reach what they would usually perceive as high-risk borrowers. By giving thin-file customers more access to credit, alternative data contributes to the achievement of financial inclusion, particularly in developing countries like Indonesia. 

 

Identify creditworthy individuals

 

Non-traditional data can be used to identify creditworthy individuals, even those with little to no credit history. Experian PowerScore, for instance, combines “ready-to-use” alternative data with adaptive learning to generate risk insights.

 

Case in point, Experian PowerScore helped a fintech lender—who was accepting less than a fifth of loan applicants—to identify low-risk customers from otherwise rejected loan applications. As a result, many cash-strapped customers and businesses now have access to this much-needed financial service.

 

By enabling lenders to assess a borrower’s capacity to repay a loan, they are empowered to increase their loan disbursements and strengthen their customer base. By acquiring good prospect customers, lenders can also see returns in their marketing and advertising activities. 

 

More than providing better insights into the applicant’s risk profile, there are many other ways in which organisations can benefit from alternative data. It can also measure the disposable income of an applicant based on their spending information from the telco partner. It can, likewise, empower companies to grow their credit portfolio and expand to new segments.

 

Alternative data is helping BNPL firms, P2P lenders, and digital banks make more informed decisions and, in turn, cater to more people. The fintech space has indeed grown due to the entry of these players wanting to leverage on the huge potential of Indonesia’s underserved segments.

 

Verify identities using alternative data

 

The identity verification process—which is challenging enough especially for the “credit invisible”—is also one area where alternative data can play a key role. After all, the lack of documents and credit histories prevent financial institutions from properly vetting the identities of potential borrowers.

 

With alternative data and non-traditional methods of verifying identities, lenders can comply with KYC (Know Your Customer) requirements. This translates to greater efficiencies on the part of lenders and allows them to process applications with reduced costs and processing times.

 

Other solutions, such as address verification, can ascertain that the address submitted on an application form is the actual residence of the individual.  

 

Prevent fraud

 

Another application of alternative data is in fraud prevention, even more so as digital adoption accelerates in Indonesia and other developing markets. By factoring in alternative data in their loan application process, lenders are better able to identify new borrowers who are good credit risks, while screening out fraudsters.

 

For example, an individual intending to commit a fraudulent application will likely use a new SIM card to avoid being identified. This type of activity will then be flagged and reflected in the person’s telco behavioural information.  

 

Using alternative data can also enhance the customer experience. By combining alternative data with technology, lenders can create a seamless experience for genuine customers, but a difficult one for fraudsters. 

 

Today’s businesses are looking for tools and solutions that can enable them to enhance their credit lending processes, reach new markets, and provide a stellar customer experience. However, more than investing in digital technology, an organisational culture that sees the value of data is key.

 

It all starts at the top. Leaders must be aware of the potential of alternative data and how it can be integrated into business processes. At the same time, other members of the organisation must learn to leverage data to make more optimal decisions. In this way, we can truly harness the power of data in the 21st century for the greater good. 

 

This article is part of a special blog series on financial inclusion in Indonesia.