My colleagues and I have long believed in the power of alternative credit data and analytics.  These are the alternatives to the “traditional” credit data and analytics, purveyed by FICO, TransUnion, Experian and Equifax, which are the most basic tools mainstream lenders use to assess whether you or I are a good risk, worthy of their fine wares.

Why do we need an alternative?  For starters, there are many people with thin files or no files that don’t provide enough data to yield a predictive score.  Let’s call these people TFNF.  Traditional credit data and analytics can’t tell us whether they are good or bad credit risks.  And in case you thought there were only 50,000 TFNF in this advanced open society, think again:  Try 50 million.  At least.  That’s 50 million people who are not getting access to credit at all, or to the highest risk type (ie the most expensive) of credit.  From an industry perspective, that’s 50 million consumers’ business left on the cutting room floor – or billions in revenues from mobile phones, to credit cards, to auto loans, to mortgages, etc.  CFSI and PERC have shown for years now that alternative data are able to score more people who were unscorable before: the old guard could typically score 80-85% of the population, whereas the alternative guys can score closer to 97%.

It’s not just the TFNF crowd who needs alternative credit, it’s also the “marginal score” crowd.  This is the segment of the country that has a “full file” with the credit bureaus (typically 3+ trade lines with 6 months+ data), but that is not considered “prime.”  Prime, of course, is what you want to be, but most aren’t.  It used to be that a 680 FICO score constituted prime.  Now that FICO has proved highly problematic (does any one still remember that sub-prime debacle from a year or two ago? The FICO score has been implicated), prime has become closer to 720.  Around half of the population has scores between 540 (the typical marker for sub-prime) and 720.  For this “marginal” risk population, neither prime nor sub-prime, alternative data has demonstrated a significant ability to separate the goods from the bads.

Even if you’re not as decidedly passionate about the underbanked and underserved as I am (I won’t hold it against you), this “marginal” category should be of considerable interest at this time in history.  Basically with the exception of the “super-prime” (not me), EVERYONE’s credit files have been “softening,” as a friend at Experian called it.  The credit crisis has lowered almost everyone’s access to credit and has lowered many people’s use of credit.  This means fewer data on which to hang our vaulted analytics.  My credit score just went down because I only utilized 1% of my available credit lines!

So who are the leaders in alternative credit?  Well, actually all the old guys, for starters, with some help: Experian has a non-bureau score developed by a company called eBureau.  TransUnion is the primary marketing partner for L2C (disclosure: I invested in this company, through CFSI’s Catalyst Fund).  Equifax has partnered with public record giant LexisNexis.  FICO has partnered with a smaller company, Microbilt (disclosure: we also invested in PRBC, which was bought by Microbilt), to market its FICO Expansion Score.  Let’s not forget VantageScore, a collaboration between the three bureaus, in an effort to compete with FICO’s mainstream dominance, includes a couple scorecards (based exclusively on bureau data) targeting the underbanked.  To date, the alternative credit industry has moved from near-prime downward.

The real reason for this post, however (sorry to be slow to the punch), is to point out a new trend: players who are moving from sub-prime (and TFNF) up.  The payday industry, which doesn’t much benefit from the traditional credit bureau offerings, has for a long time developed its own credit bureaus.  These databases have heretofore have little use to mainstream lenders.  That is changing.  Companies like Teletrack (owned by First American) and CL Verify are increasingly poised to present their data your neighborhood bank or credit union, if not your top-5 national retail bank.  My favorite trade rag, Nilson Report, reports Teletrack is delivering 10 million reports per month vs less than half that amount a year ago.  As much as the banking and AFS worlds don’t like to (say they) collide, the infrastructure that supports them sure is.  I think this is great news for both: payday can do more risk-based pricing and banks can provide more prime or near-prime products without losing their shirt.