Using alternative data to inform lending decisions is a popular trend for banks and fintech companies exploring new ways to grow their business. Alternative data can be as simple as a customer’s history with a lender. Other examples include cash flow variability, social media metrics, and information related to rental data, cellphone payment history, and other publicly available records.
On the surface, many of these nontraditional credit metrics might seem like a benign way to reach new customers or to expand offerings, but alternative data also introduces the potential for fair lending risk. Many banks neglect to confirm that their alternative data models treat all customers fairly and ethically according to fair lending laws and regulations. And all it takes is one misstep to draw increased scrutiny from regulators and auditors.