As visibility into consumer risk provided by traditional credit data shifts, financial institutions worldwide are expanding their use of alternative data throughout the consumer lending journey, according to Lexis Nexis’ inaugural Global Consumer Lending Confidence Report.
The study, conducted by Datos Insights, reveals that global financial institutions and consumers are navigating economic and regulatory changes.
Lenders are seeking more effective ways to predict risk by increasingly turning to alternative credit data to supplement the traditional credit data used by lenders for decades to assess consumer credit risk. According to 97% of global respondents, lenders identify collecting delinquent loans as their primary challenge. The report shows that 40% of respondents have observed an increase in delinquencies over the past 12 months.
Compared to 2023, lenders are less confident in making consumer lending decisions based solely on traditional credit data. Seventy-eight percent (78%) of global respondents cite challenges with limited visibility into consumers’ negative payment history. To address gaps in traditional credit data and improve decision-making processes, 66% of respondents are considering expanding the use of alternative credit data to enhance credit risk assessments and make more reliable lending decisions.
“Financial institutions attempting to assess creditworthiness with traditional credit data alone are competing with one hand tied behind their back. Lenders must embrace alternative methods,” says Kevin King, vice-president, credit risk at LexisNexis Risk Solutions. “By leveraging comprehensive data insights, financial institutions enhance their risk assessment capabilities, optimise loan portfolio performance, and achieve superior financial outcomes.”
The study involved 434 financial institution employees across nine countries, including the US, Colombia, Mexico, South Africa, India, Italy, the Philippines, Spain and the UK.
Some of the key findings from the report include:
- Top challenges for lenders: Ninety-one percent (91%) of global respondents expect delinquencies and defaults to remain the same or increase over the next 12 months. Organisations also encounter challenges in attracting new qualified borrowers, retaining existing customers, and accessing and using external data.
- Waning confidence in traditional credit data: Compared to a year ago, 59% of global lenders are less confident in their ability to compete in making consumer lending decisions with traditional credit data alone, noting gaps in traditional data’s ability to assess credit risk. As regulations change, the use of non-reported financial products increases and credit reporting practices shift, the predictive performance of traditional credit data may be waning.
- Adoption of alternative credit data: 86% of global lenders are more confident when making consumer lending decisions using alternative credit data compared to a year ago. This confidence stems from alternative credit data closing visibility gaps in understanding consumer credit health. Lenders currently use alternative credit data for pre-screen marketing, loan origination, portfolio management, and collections.