Using alternative data to compete with payday lenders

With banks hesitant to lend to unqualified borrowers after the financial crisis, many loan applicants have been turning to shadow banking and pawn shops, especially as these businesses evolve with the digital age. However, with risk management software, banks can use alternative data to offer loans to payday clientele at more reasonable rates, building a larger customer base and helping borrowers build their credit.

Time Magazine recently featured a number of online lenders that accept items, by mail, for a loan. Pawngo.com, which launched in 2009, provides the funds for borrowers to ship their items for free and gives them a loan for 80 percent of what the market value of the item is, at an interest rate of 4 to 8 percent a month. While this is more expensive than most credit cards or other loans, Todd Hills, who started the service, told the news source that 85 percent of borrowers pay their loan back.

In the digital age, using an online service is more discreet than physically going to a store. And the loans made through Pawngo and “burro,” another online pawn shop, are larger than a brick-and-mortar store, some at balances well over $1,000. Many borrowers are banked and qualified customers nervous about hurting their credit if they default.

While low interest rates are preferred, Pawngo customers are willing to give that up in order to avoid damaging their credit. However, both banks and lenders can use credit risk monitoring tools to change this. Using non-traditional data can allow banks to make loans – at lower rates – to credit-less borrowers who may be currently forced to take out payday loans, giving banks more customers and helping non banked members to a more affordable option, while helping banked members take out reasonable loans they are confident can be repaid.

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