If you’re a tech company developing a product in any given industry, odds are you are gathering insight with a revenue potential that is greater than expected. Perhaps you are developing a solution that supports a better user experience in mobile apps. In reality, your core revenue streams can come from gearing your efforts towards creating a complimentary service that may seem more typical of a fintech company.
Today’s digital world has impacted the way business is run, especially in the financial sector, and particularly in the way credit scores are given. Many new methods of evaluating an individual’s “creditworthiness” are emerging, informed by the vast amounts of consumer data available. For financial institutions and creditors, this generates new opportunities in risk assessment in the form of alternative credit scoring.
"Emerging credit scoring companies are utilizing data from a myriad of alternative sources to determine a person’s creditworthiness, including information about their daily activities, behavioral patterns and digital footprint."
What is Alternative Credit Scoring?
To understand how alternative credit scores can impact your business, it is important to understand its history. Credit scores are traditionally based on consumer credit reports, available from bureaus such as Equifax or FICO. Any credit scoring method that does not use conventional credit history information, such as prior banking transactions, falls under the broad spectrum of alternative credit scoring. Emerging credit scoring companies are utilizing data from a myriad of alternative sources to determine a person’s creditworthiness, including information about their daily activities, behavioral patterns and digital footprint.
Credit scoring agencies continually improve and update their scoring models as part of their internal process. From scanning mobile phone logs to analyzing online social behavior, creditors are making lending decisions based on data coming from these novel sources. However, basing a creditworthiness assessment on data disconnected from traditional credit and economic activity has only recently become sustainable. This is due to cost-efficient access to three key resources: availability of vast amounts of consumer data, computing power becoming more affordable, and advancements in AI.
All this, in turn, also opens up a world of opportunities for an emerging tech company like yours.
The real-time nature of the data upon which alternative credit scoring is based provides creditors with a dual advantage. First, the data helps maximize profit with a faster turnaround. Second, companies won’t miss out on potential business with borrowers who might have a bad credit score due to past difficulties but have now attained financial stability. This will also help to reduce risk and improve accuracy. An alternative credit score will be based on an applicant’s current creditworthiness, rather than their past score.
This is why financial institutions are looking to improve their new credit scoring models, and why you should be looking at it too.
Could the data from your product also be a part of an alternative credit score?
Here are the top three models of alternative credit scoring:
Information comes directly from cell phone usage, such as GPS data, contact lists, and SMS & call logs. Companies are using AI to develop scoring models by identifying relevant data patterns. These include how organized a person is, their use of contacts, the regularity of their income, transactions conducted outside the banking system and predominant locations.
The calculation of an alternative credit score, in this case, takes into account an individual’s payment history for recurring expenses, such as utilities, internet, phone bills and subscriptions to online services. This model’s idea is that a responsible payment history of your everyday expenses or monthly bills should grant you a good credit score.
Social behavior is at the heart of the alternative credit rating system. Factors such as social media footprint, career experience, education, and monthly salary, are considered. Using AI, predictive tools, and big data analytics, this system provides a method of assessing credit risk based on one’s overall social standing.
Maximizing data points for alternative credit scoring is still not mainstream. Nevertheless, we see twofold future opportunities in this growing trend. One is for startups to maximize their revenue; the second is for finance companies to improve their risk assessment in real-time. As a tech company, you may not have explicitly created a product for fintech, but you may have valuable data that can serve the industry. Now is the time to set your eyes (and your data) on this rapidly growing industry so you can meet the demand before alternative credit scoring becomes standard.