July 18, 2023

How lenders are driving profitability across the loan lifecycle with alternative data

With the increasing use of alternative data among lenders to drive customer engagement and move towards profitability, Bo Brustkern of Fintech Nexus led a discussion to take a closer look. He was joined by Franck Fatras, Co-founder of LendingPoint, Jonathan Gurwitz, GTM Lead of Credit at Plaid, and Rodney Williams, Co-founder of SoLo Funds (SoLo).

Driving the conversation:

  • Why engaging borrowers after loan origination can increase lifetime value (LTV)

  • How lenders are using alternative data to help customers with financial challenges

  • What alternative credit data can tell you that a FICO score cannot

Key takeaways:

Lenders are focusing more on the path to profitability and less on top-level growth [3:40] Historically, lenders have most often used alternative credit data as a companion to credit bureau data during the loan origination process. Given the macro environment, lenders are looking for ways to win more business from existing customers, helping to drive profitability. Alternative consumer-permissioned account data can better reflect the real-time financial situation of a consumer. It can include income, cash flow, and asset information as well as behavioral data such as customer’s preferred engagement method (by phone, digitally, etc.). More and more, lenders are relying on alternative data for post-loan origination use cases. 

“Over the past 6 to 12 months, we’ve actually seen a lot of interest and demand for post-origination use cases from the lending ecosystem,” explained Gurwitz. “Lenders are asking, ‘How can I increase the LTV of those customers that I’ve already acquired and that like my service? How do I win more of that business?’”  

Lenders are better serving customers by considering alternative data. [7:20] Lenders are using bank account balance data to help their customers avoid transactions that may lead to insufficient funds. With account data, they’re also improving servicing and collections activities by more accurately identifying customers who qualify for a loan modification or a deferment. These offerings help get their customers back on track—increasing loyalty and decreasing default rates. 

LendingPoint began relying on alternative data during the Covid pandemic, when many struggling consumers saw their credit scores drop. LendingPoint used bank account balance data to anticipate when a customer might need loan-repayment assistance. In addition, alternative data helped LendingPoint uncover that customers preferred to interact digitally, driving them to digitize their Covid relief program.

“We’re able to use behavioral data to streamline the customer experience, remove some of the friction throughout the lifecycle, and use that information to develop future products the customer actually wants,” said Franck

→ Learn more about how alternative data is used, the different types available, and the business solutions it may present.

SoLo relies on alternative data to stay connected to the needs of their customers. [5:30] SoLo performs a bank account balance check before executing a payment; if the money isn’t there, they refrain from completing the payment, preventing an account from having insufficient funds and an overdraft fee. Instead, they work to help customers get back on track. SoLo can monitor spending behavior in real time, respond quickly to changes in cash flow, and use account information when considering whether to offer additional credit. Customers are extremely loyal, rewarding SoLo with an NPS score of 90. 

“Alternative data has allowed us to really be a friend alongside the complete journey. It’s also allowed us to improve our repayment rates,” explained Williams.

By engaging customers, lenders can improve LTV and reduce customer acquisition costs. [13:30] Lenders use alternative data to get to know their customers. This enables them to offer tailored products, such as an increased credit limit or an additional loan with better rates and terms. When lenders engage their current customer base and drive repeat business, they typically have lower marketing costs and higher margins. 

In the personal loan industry, customer acquisition costs can reach 3% of the loan amount, or about $300 for a $10,000 loan. It makes sense, therefore, to invest in tools that can increase the LTV of current customers. LendingPoint has become more proactive about user engagement. Franck shared that 40% of their growth came from repeat customers last year.  

“You see more re-engagement, consumers come back if they’re happy. That offsets some of the cost of doing the research throughout the lifecycle of the customer,” explained Franck.

Many fintech lenders without an engagement platform are working to create a way to utilize alternative data. [18:20] Closed-end loan providers, like personal loan and auto lenders, lack an easy way to engage with customers once a loan is approved—historically, a “set it and forget it” scenario. As they look for growth opportunities, these lenders are acquiring or developing new products and services that better engage customers. Gurwitz shared the example of loan provider and digital banking platform Oportun acquiring Digit, a neobanking platform that provides automated savings, investing, and banking tools 

Artificial intelligence (AI) is being used to optimize alternative data. [21:00] SoLo uses AI to create a “SoLo score” which predicts the default rate for each customer. LendingPoint uses AI to improve customer service phone support. Plaid leverages AI and machine learning to help their customers with many critical functions including clarifying transactions and identifying accurate transactions categories. Additionally, with consumer-permissioned cash flow data, Plaid customers can leverage AI internally to build out workflows and optimize processes.

Go deeper: Learn more about driving profitability with alternative data