Assessing the alternative credit market

Assessing the alternative credit market

There's something of a seesawing effect in the financial services sector, in which certain things remain largely the same despite the considerable number of changes that occur within the field, many of them related to technology. One can observe this in the spread of alternative credit data through the market: Traditional credit scoring models like the basic FICO and VantageScore methods are still utilized with greater frequency than their newer counterparts, due almost solely to the entrenchment of FICO and the Big Three of credit reporting among institutions most commonly conducting credit assessments.

"Alternative credit is slowly but surely emerging as a viable competitor to traditional scoring models."

With all that being said, nontraditional ways of gauging credit have come a long way since their initial introduction into the financial world several years ago. Let's take a look at where they are now and where they might end up in the future.

Early years of alternative credit 
The notion of stepping outside the box created by traditional notions of credit measurement, so to speak, first started gaining prevalence in the late 2000s and early 2010s. (PRBC first proffered our alternative model in 2005, slightly ahead of the curve.) 

The essential concept of alternative credit is using data more reflective of Americans' everyday financial realities to paint a picture of personal financial situations that depicts how truly financially stable (or unstable) these individuals are. Considering that a gainfully employed individual who makes regular rent or mortgage payments could easily still have a mediocre or outright bad FICO score, it had become clear that another way was necessary. 

A growing rate of acceptance over time
The language of the Equal Credit Opportunity Act stipulates that individuals can't be barred from submitting proof of alternative credit by lenders solely based on the method chosen - though lending institutions would still be within their rights to deny applications almost immediately after accepting it. But over time, alternative scoring began to permeate the financial services sector, and consumers began using it in greater numbers. Currently, 8,500 businesses in the U.S. use PRBC's scoring method on a regular basis.

In the near future, alternative scoring may find itself within the financial mainstream. According to The New York Times, the Consumer Financial Protection Bureau has begun examining the viability of alternative credit reporting methods being deployed and accepted on a broad scale. The CFPB commented on the possibilities of widespread alternative credit in a prepared statement, first noting the tendency of lenders to avoid approving loans of individuals with credit scores below 620 on FICO or VantageScore.

The CFPB, as part of its investigation, opened a dialogue with the traditional credit industry regarding this matter. While they may well encounter pushback, this nonetheless represents a step in the right direction for alternative credit.