Online Lenders Are Using Alternative Data And Mobile To Reshape Credit

Consumer credit startups collect massive amounts of data – over 100,000 data points per customer, in the example of online lender Earnest – but the challenges arise in determining which data actually correlates to creditworthiness, said Rebecca Kaden, partner at Seattle-based VC firm Maveron.

The correlations have to be identified over time, said Kaden (pictured above), referring to parsing big data to find significant correlations that aren’t already encapsulated in FICO scores. She was speaking at CB Insights’ Future of Fintech panel on consumer credit. Maveron’s portfolio includes Earnest.

Sean Rowles, chief credit risk officer of PayPal, advised startups to use their data to manage existing customers effectively, rather than being too focused on customer acquisition. That’s especially true considering expectations of tighter credit conditions.

“In Silicon Valley where so much of the emphasis is on top-line growth, I worry that we’re losing focus on how much credit can bite you in the butt in different economic cycles,” Rowles said.

A third panelist Colin Luce, head of sales and business development at Klarna, mentioned several alternative data methods he saw as having strong potential. For example, Luce said point-of-sale financing products can leverage contextual information about the purchase to help make credit decisions, before even capturing any personal user data.

For example, the types of items someone buys, and the time of day can indicate whether or not a purchase is likely to be fraudulent.

“In the history of fraud, there’s never been diaper fraud at eleven in the morning,” Luce commented, “but two iPads at 3 a.m.?”

The panelists agreed access to credit will expand — both in terms of attracting new users and expanding the channels in which credit can be used.

Regarding new users, Rowles argues that fintech and alternative data could have more impact in developing economies than they have in the US market. We’re already “spoiled for data” in the US, he said, but many other countries have weaker traditional financial infrastructures, and access to new data on borrowers could allow lenders to offer credit to more people.

In terms of channel expansion, Luce discussed Klarna’s interest-free, 14-day credit products. Klarna hopes online shoppers will use them even when they could easily pay up front, because the loan process will be so convenient.

These credit products, offered just on the basis of email addresses and zip codes, “can actually make it easier to purchase than pulling out my credit card,” said Luce. “There’s a huge appetite on the consumer end to utilize that, and it ultimately drives higher conversion rates and higher sales, for the merchants.”

He mentioned that some European merchants using Klarna’s free 14-day point-of-sale financing saw mobile conversion rates nearly reach the rates on desktop, though they’re usually closer to half.

Luce said that convenience is a driving principle for Klarna: “How can we bring the ease of Amazon one-click purchase to the mass consumer?”

Kaden agreed that convenience is a core value proposition, due to users’ habituation to on-demand services. “You become accustomed to convenience by ordering Ubers, by shopping online, and you expect the same [ease] in your financial services,” she said.

Despite increasingly convenient loan options, Kaden said we shouldn’t expect startups to supplant traditional players any time soon — especially in a tightening credit cycle.

“The exact companies, Earnest included, that are trying to take market share from the big players in the space are still very dependent on them,” she said.

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