How Alternative Data Transforms Credit Risk – with John Gordon

Episode Overview

John Gordon is the CEO of ValidiFI, a leading provider of alternative data solutions that enhance financial decision-making. With a career spanning over two decades in fintech, Gordon has been at the forefront of transforming how financial institutions assess credit risk and detect fraud. He co-founded ValidiFI to bridge the gaps left by traditional credit scoring methods, focusing on the connection between consumers and their bank accounts. Under his leadership, ValidiFI has pioneered the use of bank account intelligence to provide a more comprehensive view of a consumer’s financial behavior, which is crucial for accurate credit assessments and fraud prevention.

Gordon’s expertise extends beyond credit risk assessment; he is also a thought leader in financial inclusion. He believes that alternative data can empower underbanked and unbanked populations by offering them access to credit products that were previously unavailable due to limited credit histories. His approach emphasizes the importance of using a consumer’s financial behavior, such as bank account stability and transaction patterns, to inform lending decisions. This perspective aims to create a more inclusive financial ecosystem where individuals are not excluded based on traditional credit scores alone.

In addition to his work at ValidiFI, Gordon is actively engaged in discussions about the future of fintech and the evolving regulatory landscape. He has been vocal about the need for innovation in financial services, especially in the face of uncertain regulatory environments. Gordon advocates for a “business as usual” approach, encouraging fintech companies to continue innovating and forming strategic partnerships while remaining adaptable to regulatory changes. His insights into the intersection of technology, finance, and regulation make him a respected figure in the fintech community.

Episode Transcript

John Gordon: There are some scenarios where those scores are maybe fictitiously high and there’s going to be a course correction because credit scores are lagging indicators. So we believe pairing that data with data like this solidifies. That will tell you that consumer and that account we’re going to assess them. We’re going to identify potential fraud. We’re going to assess the stability of the bank account. We’re going to look from the standpoint of the consumer to the bank account.

Kevin Rosenqvist: Hey there. Welcome to Pay Pod, where we bring you conversations with the trailblazers shaping the future of payments and fintech. My name is. Thanks for listening. Financial institutions have been using the same traditional credit scoring methods to assess risk for a really long time. So that begs the question are traditional scoring methods giving all the data that lenders need? Alternative data is stepping in to bridge the gap, offering deeper insights into consumer behavior and creditworthiness. And my guest today is , CEO of validity, a company that specializes in alternative data solutions to enhance financial decision making. In this episode, we’ll break down what alternative data is, why it’s transforming financial services, and how the credit landscape has changed and continues to change. So please welcome . So let’s start by talking about what alternative data is. So traditional credit scores have been the backbone of lending decisions for decades. But they don’t always tell the full story. Can you explain what alternative data is and how it provides a more complete picture of credit risk?

John Gordon: So alternative data, I think Kevin has morphed over the course of the past 8 to 10 years. At one point there was the big data component where we were considering social media and a lot of other ancillary factors around consumers, but those things aren’t permissible within the fCRA. So alternative credit data to me centers around trade lines, interactions and bank behavior that a consumer participates in that will allow for service providers to make more informed decisions. Trade lines and credit scores. Fico and vantage scores are really focused on a number of different factors that I think most people are pretty familiar with. It’s your credit mix, your experience in securing credit, your ratios as it pertains to open and revolving balances, things of that nature. And alternative credit is ancillary to that. How do you what’s your velocity? What’s your frequency of change with the types of credit and your payoffs of those credit. And a lot of that started some years back because there were certain trade lines and areas that the credit bureaus didn’t participate in, and that would have been unsecured lending, also known as payday loans, where consumers weren’t. That data wasn’t reported. So there was like a hole in the credit data that has been filled by this alternative credit. And I think it substantially tells you things about a consumer in their behaviors that give you a much more comprehensive picture about that consumer. And I think actually, it’s even becoming more pertinent today because the credit bureaus have now decided they’re not going to include your medical debt and heard about that. Yeah, right. In an effort to be fair to consumers. But the fact of the matter is the consumer still owes still has the credit obligation. It’s just that we’re not including the information. And with the emergence of buy now, pay later and other credit vehicles. The fact of the matter is, we’ve been scoring consumers the same for decades. But the way consumers acquire credit is vastly different than it’s been in the past. Yeah.

Kevin Rosenqvist: That’s that that is the point, I suppose, right, that the way we do credit is so much different. The way we get loans and whatnot is so much different. But yet we were holding on to these very sort of simplistic views of somebody’s past. When it comes to credit.

John Gordon: I think you’re exactly right. And I think if we’re going to say I’m not going to include medical debt, one of the bureaus and I don’t recall which off the top of my head said that they weren’t going to include buy now, pay later data if it was detrimental to the consumer. Well, that sort of runs counter to the idea that it’s information for the purpose of qualifying a consumer for credit.

John Gordon: And the impact of that potentially is a rising cost of credit for all consumers. You know the CFPB. And I realize as we’re talking today the CFPB may be a thing of the past.

Kevin Rosenqvist: We’re not sure if they’re going to be in existence exactly.

John Gordon: But regulation will be whether it’s done by the states or it’s done by other organizations. The bar that lenders were being measured against was ability to repay. Have you considered that consumer’s ability to repay? And if we’re tamping down the availability of information on consumers debt obligations, we’re making it almost impossible for someone to determine, can that consumer afford that when you can’t find the information? So I think alternative credit, and I’m going to try in a very in a way, to come back to your initial question, I apologize for the long winded answer, but I think at the end of the day, alternative credit fills in those gaps and enables service providers and lenders to make credit decisions, to make product designations, to put a consumer in a product that they’re going to have the most success with.

Kevin Rosenqvist: Yeah, that’s a good point, too, because it’s not just about being fair to the consumers. As far as you know, you don’t want to include certain buy now, pay later or medical debt or whatever so that they can have an easier time getting credit. Well, hey, they don’t always, they shouldn’t always have certain credit. Right? Like there should you want to kind of almost, for lack of a better term, protect them from themselves.

John Gordon: That is the metric that they are being measured against. Did you knowingly or with available information, could you have deduced that you were setting that consumer up to fail?

Kevin Rosenqvist: Mhm.

John Gordon: And without the available information, it requires anyone who’s being held to that metric to find information to backfill so that they can make a decision with all of the pertinent data.

Kevin Rosenqvist: Mhm. Yeah. Setting people up to fail. That’s why they don’t do it the same way. When I was, when I was a young man and went to the Chicago Blackhawks game and got a credit card for so I could get a free t shirt. And before I knew it, I was in debt.

John Gordon: No, I’m with you and I will date myself. What was the name of the, uh, scheme where you got 13 cassettes for a penny. But we were all signing up, signing our lives away for this never ending. You owe money, was I? I won’t say who I think the name is for fear that I might get it wrong, but I think.

Kevin Rosenqvist: It’s Columbia House. I’ll say it. I think it’s Columbia House.

John Gordon: So, you know, I think we’re all familiar with that. Were they setting you up to fail? You bet.

Kevin Rosenqvist: Yeah. They’re banking on you failing. Let’s be honest.

John Gordon: Hundred percent.

Kevin Rosenqvist: Yeah. So are there other use cases for this, for alternative data that you guys see?

John Gordon: I think the use cases are very broad. It can be for onboarding, for putting the consumer in the right product. It can be for credit assessment. Alternative credit is extremely valuable in identifying fraud. So frequency of change that shows up in an application as it pertains to email addresses, bank accounts, phone numbers, property addresses, all of those things provide signals that correlate to the fraud profile associated with that consumer. The idea that you can simply validate somebody’s identity anymore is completely insufficient in the world we’re dealing with, when every day the people who are perpetrating fraud get better at it.

Kevin Rosenqvist: Right. And better tools.

John Gordon: 100%. So playing defense against that never ending specter of the way that fraud is perpetrated, or the idea there has to be a sharing of information as a defense or everyone has that sort of first mover disadvantage. And that’s something that we try and do is take information around the connection between a consumer and the PII and the bank account, and use it as a line of defense for our clients.

Kevin Rosenqvist: Yeah. Can you talk a little bit about the validity platform and how, you know, the technology is helping lenders make better decisions? Anyone who needs alternative data, can you kind of speak to the platform itself?

John Gordon: 100%. So we are a SaaS provider of and we’re focused in the alternative data space and we really apply our data. We have over a billion inquiries on consumers where they’ve applied for service or credit. And we are focused on the connection between the consumer and the bank account, because we learned some years ago that the value of the consumers bank behavior is additive to simple credit scores. We’re certainly not representing that there’s ever going to be a day that people don’t need credit scores. But there are things about those credit scores that we can add, whether that consumer is ascending or descending based on behavior, based on frequency of change, based on bank account information. So we are in a place right now in the United States of America, where the highest percentage of Americans have access to a bank account per the FDIC, than we’ve ever seen in history. So 95.5% of Americans are considered banked. When you compare that to the number of consumers who are in the credit header, whom we can score it, it dwarfs that number. Now it’s like 95.5% to the low 80s. So the ability to not only quantify those consumers, but also to separate out consumers from a credit score standpoint. So average Fico scores, as you and I are talking today is 715, which over the course of the last decade is up 4%. I don’t know about you, but based on the cost of consumer goods, inflation, all of those other things, I’m hard pressed to believe that consumers are better off today than they have been at any time over the previous decade.

John Gordon: So we believe that in the post-Covid scenario where consumers were being augmented with government funds and there were forbearance and people were not able to go out and spend that, there is some some scenarios where those scores are maybe fictitiously high and there’s going to be a course correction because credit scores are lagging indicators. So we believe pairing that data with data like this solidifies. That will tell you that consumer and that account we’re going to assess them. We’re going to identify potential fraud. We’re going to assess the stability of the bank account. We’re going to look from the standpoint of the consumer to the bank account. How many different bank accounts have I seen with Kevin? How many different consumers have I seen with the bank account that Kevin brought to us? What is the history of goods and bads? How long has it been in our network? So we often call that, uh, it’s performance based on longevity, recency and stability so that we’re able to tell you that account, Kevin has brought to us the magic numbers for there’s less than four consumers who have access to that account. It’s been in our network for a period of greater than two years. The returns. Do you have returns? When was your last return? What kind of return did you have? Because all of these things matter.

Kevin Rosenqvist: Do you feel like the alternative data, does it benefit the consumer over the lender or or vice versa? Or do you think it’s pretty? Do you think it benefits both equally?

John Gordon: So there was a study and it’s a little bit old. It was a Harris poll that said 73% of consumers are willing to provide additional data for what they called a fairer credit process. And so providing access to additional data for consumers when they feel like the juice is worth the squeeze, meaning that if I provide you access to data or I provide you my bank account routing number, I’m doing so in exchange for an honest assessment of my credit worthiness and the product viability. For me, I think it benefits the consumer.

Kevin Rosenqvist: Okay. So you’re a SaaS platform. Who are your typical clients?

John Gordon: So we work with anyone who wants to validate bank accounts and assess risk. So. Nacha, are you familiar with Nacha? I’m sure you are. The national automated Clearing House Association.

Kevin Rosenqvist: Oh, yes.

John Gordon: Yes, yes. Which is the governing body over ACH transactions? Yeah.

Kevin Rosenqvist: Let me think about nachos. And I haven’t eaten yet, so I think that’s where I went.

John Gordon: Well, now you’ve taken me there too. So nachos sounds good all of a sudden. It does, does.

Kevin Rosenqvist: It.

John Gordon: Not. To requires that at your first interaction with a consumer of their bank account, that you validate that account as open, valid and facilitates. Ach they are amending that rule in 2026 to add fraud to aspects to that, so that I have to validate an ownership application. So any company who takes ACH payments and ACH payments, oh, by the way, and this is sometimes a forgotten fact, are growing for ten consecutive years in the number of transactions and the amount of those transactions. And it’s growing across all of the core payment competencies that are out there, whether it’s person to person payments, bill payments, healthcare payments, any of the major categories, people relying on ACH continues to increase. And there’s benefits for people who provide services in that by taking account to account payments, they eliminate some of the interchange fees that are associated with credit card payments. So pay by bank is an emerging application. And we help our clients and our clients, some of whom are payment processors, some are lenders who want to assess risk. Really, those are the primary applications. But we also work with companies who provide a service. I’ll give you an example. We did a press release with a company called PDI. Odi works with convenience stores to attach near debit programs to the loyalty cards that those convenience store offers. And what we do is we facilitate the account validation piece between the consumer and the account that enables PDI to signal to the convenience store, you’re good taking those payments from that consumer. And they do all of this under the guise of the loyalty programs to incentivize consumers to return to those convenience stores.

Kevin Rosenqvist: Right. Do you find that? I mean, I imagine that most consumers are maybe not. Most consumers are unaware that alternative data is even being used to assess their credit worthiness. Do you think that’s true? Do you think that the industry is transparent enough? Are people learning more nowadays?

John Gordon: Well, I would tell you there is a flavor of what some people deem alternative credit, which is credential bank account access. And this is where a service provider or a lender sends a link to the consumer and that consumer logs into their bank account. The lender is then given access to 90 days of. In most cases of transactional data, and this is cash flow underwriting on these consumers. The number varies as it pertains to what the consumer’s appetite for that level of access is. We have the ability to offer those solutions, but what we find is if you do it without the friction of the consumer logging into their account, there is still much to be gained by a consumer providing you their bank account and routing number for you to do an analysis of that consumer’s relationship to the bank and how much other parties have access to that bank account. I’ll give you an example, Kevin. We had a lender who sent us data for us to do an analysis on. We found that almost 10% of their bank accounts we’d seen with greater than 20 consumers.

John Gordon: We also were able to tell some of our clients, if you have a what we call fatal returns are threes or fours and we call it fatal because there’s no recourse for the service provider. If a consumer or an identity, I should say, because it ultimately may not be that consumer right has shown a proclivity to do that. They’re going to do it again. We can also tell you that once an account is in an NSF position, the likelihood that their next transaction within a certain window of time is going to be NSF increases exponentially. So it’s those types of things that we’re able to help our clients make better decisions on. This is potentially fraud. And as a result, I’ll drive my underwriting treatment strategy in a certain direction. I’m being compliant based on the fact that I have validated that account’s viability and efficacy. And then also I’m potentially assessing the risk of that consumer because of the type of account, the type of financial institution, the number of accounts that a consumer may be dealing with.

Kevin Rosenqvist: Mhm. Do you find also that this helps with financial inclusion is a general rule that alternative data will help maybe the underbanked unbanked population.

John Gordon: I think it does help them because it gives them a method by which they can be quantified. So 40% of the US population has a credit score below 700, which technically makes them non-prime. But I would also tell you, Kevin, at validity, we’re really in the facts business. So we’re going to tell you what we know about a consumer in the bank account and the email address and the phone number that they’ve listed. Without trying to create a scenario where inclusivity or opportunity is it is part of the transaction. Action. We want you to be able to make the best decision. And ultimately we believe by bringing a lot of that data together, we’re going to empower you to do it. It may be that certain consumers are relegated to different credit products over the course of time as a starting place. But ultimately, you know, sometimes inclusion comes with the unintended consequence that those consumers are being set up to fail. And ultimately the cost of credit rises for everyone.

Kevin Rosenqvist: Right. Yeah. Just kind of piggybacking on what we talked about earlier, about setting people up to fail. Yeah, that’s that’s a good point. It’s a good point. Inclusion does not necessarily always mean everyone wins, right? Right.

John Gordon: Agreed.

Kevin Rosenqvist: Yeah. So, you know, beyond utility bills, bank transaction data, you know, anything else that’s new? What what new sources of alternative data do you think will continue to pop up will play a big role over the next, I don’t know, 2 to 5 years. Do you think that you see more stuff coming on the horizon?

John Gordon: I do. Uh, so in October, we announced a collaboration with JP Morgan Chase. With their payments, they have 10 billion payments. That’s going to give us an enhanced ability to make the connection between a consumer and the account, to clarify ownership. And I think this is just the tip of the iceberg as it pertains to companies who are going to be interested in participating in Data Consortium’s data availability. That’s going to make it easier to connect consumers. And to the point of your previous question, it has the potential to create more mainstream credit opportunities that are more widely accessible than the way we’ve scored consumers in the past. So I think all of that is beneficial. And I think as we see more people come into an arena where they’re willing to share data, it’s going to be a safer environment and an environment where we’re dealing with more knowledge, more information, which would create the knowledge than we have in the past.

Kevin Rosenqvist: You’ve been pretty deeply involved in fintech and data driven decision making for quite some time. What you know, fintech is obviously it’s blown up with the way with in recent years especially. You see a lot more companies with AI capabilities and all that. They’re bringing AI into things. What have you seen as the biggest change in the space over the last over your career? I guess what has had the biggest influence on change in fintech?

John Gordon: So I would say it’s the the access. You know, smartphones and the internet more generally speaking, have created open access to credit to people who want to offer credit. And it’s empowered lenders who want to cater to different segments of the credit scenario. So I started in, uh, alternative credit in 2008, and we came up with, I don’t know if we came up with the term. We highly leveraged the term underbanked to mean consumers who underutilize the offerings of their financial institution to meet their credit needs. And it was largely because of the fact that they concluded they were going to get a no. And so now you’ve got this, this opportunity for consumers, whether it’s buy now, pay later, whether it’s unsecured personal loans, which is exploded, buy now, pay later is obviously the fastest growing credit type. There are opportunities for people to secure credit and have those options that are so vastly different than I go to the bank, I cross my fingers. Maybe they say yes, maybe they say no. And I don’t have a lot of options to shop rates. That’s not the case in 2025, right?

Kevin Rosenqvist: Yeah. There’s apps and websites and stuff you can apply to multiple cards at one time. You can apply for different loans at one time. It’s definitely yeah, it’s changed quite a bit.

John Gordon: I know lenders in the space who will proactively shop the rates that they offer you. The advent of soft credit pulls so that you’re applying for a loan, they show you the terms and the percentages, and then you as the consumer, have the option to make the decision on whether or not that meets your needs. All of those things are hugely different than where we were 20 years ago.

Kevin Rosenqvist: At this point in 2025, our financial institutions and lenders and banks are they embracing alternative data? Are they are there some still resistant to it?

John Gordon: Yeah, I would say there are quite a few who are embracing it and finding a way to work with their consumers. I see it in the credit union space, where the credit unions are trying to work with their members to provide them access to funds at different points in their journeys, if you will, whether it’s access to payroll, access to small credit amounts so that they’re meeting their needs. So I absolutely think there’s a movement afoot to be able to do that. Um, and it’s the other aspect of that, though, Kevin, is you’ve got the emergence of the neobanks, the Non-branch digital banks, which has changed a little bit of the interaction that lenders have with the consumers based on whether or not they’re utilizing those banks or are they utilizing traditional banks. We’re seeing a lot of movement around that area as well.

Kevin Rosenqvist: When you talk to someone who might be resistant to alternative data, what do you tell them?

John Gordon: Most of the time we lead with the scenario of if you are resistant to the utilization of alternative data, send us a file and let us tell you what we could tell you about that consumer. There you go. And you make the decision that’s best for you.

Kevin Rosenqvist: Yeah. Proof. Proof is in the data right in front of you. I suppose that’s a good way to do it.

John Gordon: Absolutely. We think, you know, oftentimes here we talk about the fact that we’re trying to get to a data study because we believe the data has enough value that people will incorporate it. And that has largely been the case for us.

Kevin Rosenqvist: Yeah, I believe it. All right. Well, the company has solidified. , thanks so much for being here. Really appreciate your time.

John Gordon: Thanks, Kevin I enjoyed it.