Credit scoring could be about to get very interesting but if the system is to be revolutionised, the pressure needs to keep coming from the fintechs, writes 11:FS' Amy Gavin.
Credit scores are notoriously complicated with a lot of confusion around what’s actually included in scoring models. The incumbents used by institutions to assess creditworthiness, each use a different max score - Experian scores you out of 999; TransCredit out of 710 and Equifax, 700.
A lack of universal score means that in order to get a true picture of your creditworthiness, you’ll need to collect scores from all three. Feels like a lot of effort. And that’s before you’ve even started the lending application.
The system is also disproportionately weighted against the young. Stats from Experian show that younger people generally have the lowest credit scores, mainly due to a lack of credit history. Not helpful when you’re in your prime spending years; looking to fund that house, wedding, round-the-world trip… (and guilty eBay habit).
Another group perceived as high risk is the self-employed. Tricky for freelancers and small business owners looking to borrow to scale-up.
And god forbid you’ve got any skeletons in your closet. That mobile phone bill you forgot to pay two years ago could haunt you long into the future when it comes to your credit score.
The good news? Someone’s got your back
We’re finally starting to see a real shake-up of the market, with a variety of new players bringing some pretty tasty ideas to the credit scoring table.
One exciting area of innovation focuses on the key factors included in scoring models across the industry.
Rent payments, despite being a major outgoing (headache) for a growing number of us, have traditionally been excluded from credit reports as an indicator of creditworthiness. Not anymore. CreditLadder is a tool enabling customers to use on-time rent payments to improve their Experian credit score. Through partnering with lenders, including Nationwide and Starling, they’re making credit more accessible for those yet to make it onto the property ladder. A long-awaited nugget of good news for generation rent!
Challengers, such as Lenddo and Zest Finance, are also experimenting with using non-traditional data to calculate risk. As part of their mission to build scores for the unscorable, these fintechs leverage AI-based tools to assess potential borrowers based on financial behaviour that sits outside of typical credit bureau reporting. For example, buying a car at an independent dealer or shopping with a prepaid debit card.
Enabling access to credit for those with a limited history is important, but it’s also essential to recognise where an inclusive system becomes intrusive. Big data is a tool that must be used with caution.
Another area under scrutiny from the fintechs is credit score accessibility. Instead of signing-up for a £14.99 monthly subscription to Experian (you can probably think of better things to spend your money on), mobile apps from the likes of ClearScore and WalletHub let you check your score and report for free.
Credit Karma offers various free tools including a credit score simulator. This clever little feature enables users to instantly see how credit choices, such as applying for a new credit card, might affect their TransUnion and Equifax scores.
Consumers can further benefit from how frequently these apps are updated. Traditionally, changes or corrections could take up to six weeks to appear on your credit report.
Considering that over 1/3 of people find mistakes on their credit report when checking for the first time, that’s pretty frustrating. In contrast, Credit Karma refreshes weekly and WalletHub daily, providing you with a more up-to-date picture of your creditworthiness.
Not content with just playing on the outskirts of the industry, innovators are now looking to take on the credit bureaus themselves.
Credit Kudos, who just announced a £5m Series A funding round, is the new challenger bureau using financial behaviour to provide a fairer representation of creditworthiness for individuals and businesses. Through new Open Banking rules, Credit Kudos can connect with all major banks to securely access your financial history and factor this into real-time credit decisioning.
They’ve partnered with Cybertonica, a machine learning and AI platform, to incorporate biometric and behavioural analytics e.g. mouse movements, into their scoring model. Cybertonica’s new ScreenWize tool takes transaction data to the next level in a pretty cool way; advancing application scoring for both applicants and lenders and significantly speeding up the process.
What does the future hold?
Innovation is all well and good, but credit scoring has, and always will be, a bit of a sticky subject. Scores exist for a reason. They’re not just about ensuring people who should be getting access to credit can get it, but also protecting those that shouldn’t be borrowing from getting into financial trouble.
As the industry evolves, fintechs and incumbents must work together to ensure the FCA’s responsible lending rules are not forgotten; putting customers at the heart of innovation whilst ensuring that no-one is biting off more debt than they can chew.
However, fintechs are exposing the cracks in the credit system and reshaping our financial expectations. More inclusive, personalised and fair? Yes, please.
New propositions are finally empowering consumers and encouraging lenders to question scoring model assumptions. Issues around algorithmic transparency persist, but awareness of what does and does not affect your score is growing at pace.
The CMA is doing its bit to increase competition in the industry, blocking Experian’s £275m acquisition of ClearScore last year on the grounds that it would dis-incentivise innovation in the market.
Ultimately, if the credit system is to be truly (and responsibly) revolutionised, the pressure needs to keep coming from the fintechs. Hold tight and watch this space; credit scoring is about to get very interesting.
Amy Gavin is a market researcher at 11:FS, responsible for investigating and analysing key fintech trends.
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