Why Startups Should Look at Credit Scoring

To Diversify Their Revenue.

Daphna Meroz
VP Innovation at SOSA
Photo by Jannes Glas

If you’re a startup, odds are you are gathering data-driven insights with a revenue potential that is greater than expected. Perhaps you are developing a tech 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.

Consider this:
Today’s digital world has impacted the way business is run, especially in finance, 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 available consumer data. 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 startup, 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 and more inclusive. This is due to cost-efficient access to three key resources: availability to vast amounts of consumer data, increasing affordability in computing power, and advancements in AI.

Busy subway station in New York City virtually animating machine learning analysis and identification technology to show personal social credit scores

All this, in turn, also opens up a world of opportunities for an emerging startup like yours.

Here’s why:

The real-time nature of alternative credit scoring 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 poor 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 fintech solutions to improve their new credit scoring models, and why you should be looking at it too. 

"The real-time nature of alternative credit scoring provides creditors with a dual advantage.'
A woman using her virtual wallet to tap and pay for her coffee
Photo by Blake Wisz

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:

Cell Phone Usage

Data comes directly from cell phone usage, such as GPS history, 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, income regularity, predominantly-used locations, and payments conducted outside the banking system on fintech platforms such as Wise, Skrill, and Venmo.

Daily Expenses Payment History

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 online service subscriptions. The premise of this model is that a responsible payment history of your everyday expenses or monthly bills should grant you a good credit score.

Social Behavior Credit Rating 

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 tools such as AI and predictive and big data analytics, this system provides a method of assessing credit risk based on one’s overall social standing.

People using their payments app on their smartphone to send money to their friend
Photo by Robin Worrall
"As a tech company, your product might not have been created specifically for fintech, but the finance world is listening in and looking for new ways to improve risk assessment in real-time."

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 financial institutions to improve their risk assessment in real-time. As a startup, 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.

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