Scoring a better future with data – one algorithm at a time

In an age of algorithms, how can we leverage data to truly engage our customers and provide real value – to be there at the right place, at the right time, regardless of their demographics?

From lenders to landlords to telcos, credit scores are key to our ability to obtain credit, determine loan rates, set security deposits, or even secure employment. However, if you ask consumers what their credit scores are, or what data are being used to derive those scores, most will probably tell you that they don’t know. In fact, according to a survey by Lending Tree, “Nearly 4 in 10 Americans have no idea how credit scores work.”

This is in spite of the fact that services like Credit Karma, providing free credit scores, reports and insights to tens of millions of users. It is now commonplace for financial providers to extend access to these scores and the factors behind them, and there are new services launching to provide ways to help us decipher these magic numbers, yet the lack of understanding around this black box of data persists.

According to CFPB’s latest report, about 20 percent of American adults face obstacles obtaining credit. Among them:

[1] About 11 percent (26 million) were credit invisible

[2] An additional 8.3 percent (19 million) had credit scores that were unscorable – due to too few accounts or accounts are too new

But just because you are credit invisible or you have a thin credit file does not mean you are not credit worthy. Far from it. From immigrants to foreign students, as well as older adults whose credit histories shrink or become stale with age, there is a business imperative, and a responsibility, for the industry to innovate and bridge the credit gap.

One such startup that is seizing on this opportunity is Leap Finance, who just raised $5.5 million to democratize financing for foreign-bound Indian students. Arnav Kumar, co-founder of hte startup, commented in an interview recently:“Indian students in the U.S. can secure financing from Leap Finance at an interest rate of between 8% to 10%,” based on several alternative and derived data points to assess a student’s future income.

And while the use of alternative data may still be at its infancy in the U.S., it has been credited for enabling financial inclusion in developing economies such as China, India, and Southeast Asia.

ZestMoney is a microlending Indian startup that helps consumers without a credit score secure loans and make purchases online, often for the first time in their lives. Lizzie Chapman, CEO of ZestMoney, recently announced that they raised $15 million from Goldman Sachs and existing investors, including Flourish. “Lending is easy; responsible lending is hard,” said Lizzie in our prior podcast interview.

What roles do providers play – in securing the financial future for consumers, especially in times of uncertainty? We should expect more from our industry to add transparency and education around this critical component judging financial behavior. While it is very positive to see the impact of the changes driven the past decade, we still have more work to do.

Tune in for a new episode of One Vision on iTunes and Spotify, where Theo and Bradley chat with Alex Johnson, Director of Marketing at FICO, on payments, fintech in China, financial inclusion, and his personal passion, financial education.

And don’t forget to subscribe to Alex’s newsletter here: https://ficofintech.substack.com/

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