Your FICO score: As an individual, it determines your “creditworthiness.” Your personal score can even sometimes affect getting business credit, in the early days of a start-up. And of course, it affects the degree to which your customers can open new accounts, or the degree to which they’re charged to keep using current ones.
But an intriguing article on the Pymnts.com website asks, “are the days of the FICO score as the be-all, end-all consumer credit scoring standard coming to an end?”
In seeking to answer their own question, the overview says that “driven by alternative lending players who’ve… developed their own lending criteria based on proprietary algorithms, a consensus is emerging that the backward-looking FICO measurement system could perhaps stand a digital age makeover with models that are based more closely on the real-time data consumers are producing, as opposed to historical data about their spending and debt management.”
“‘FICO-based underwriting doesn’t do a very good job of answering two questions: ‘Can you pay us back, and if you can, will you pay us back?’ And that’s what we’re really good at seeing, because we look at thousands of small data clues that give us the answer,’ Doug Merrill, CEO and Founder of ZestFinance, said to Pymnts.
The article notes that Zest is one of a new batch of “credit rating” companies all considering additional digital-age metrics, rather than keeping all potential consumers stuck with a score that penalizes them for having been in the middle of a Great Recession for example. For example, the article notes, keeping the same cell phone number for many years is a sign of bill-paying stability (often, with prepaid phones, numbers are “repossessed” if payments aren’t made).
This comes at a time when traditional credit bureaus find themselves on the defensive over security issues, particularly Experian, in the wake of the T-Mobile customer hack. How can these bureaus be trusted to make accurate assessments of people based on data if they can’t even keep that data safe?
We reported on that hack last week, and in the follow-up, according to the BBC, there’s been some call, in the wake of Experian’s claim that only servers of its subsidiary, Decisioning Studios, were affected, to have “both the Consumer Financial Protection Bureau and the Federal Trade Agency to investigate whether other Experian databases had been breached.”
One Experian critic asked “If the server holding the T-Mobile files was subject to fewer security protections than the full Experian credit reporting database, why? If it was subject to the same protections as the credit reporting server, doesn’t this raise the troubling possibility that the server holding highly sensitive credit and personal information of over 200 million Americans is vulnerable to a data hack by identity thieves?”
As for the “identity” one assumes by having their creditworthiness decided by reporting bureaus like Experian, the newer alternatives, like ZestFinance, describe themselves as taking “an entirely different approach to underwriting using machine learning and large-scale big data analysis.
“With a team of some of the world’s best data scientists from Google and lending experts from Capital One, ZestFinance analyzes thousands of potential credit variables – everything from financial information to technology usage – to better assess factors like the potential for fraud, the risk of default, and the viability of a long-term customer relationship.”
So in addition to including how long one has kept a mobile phone number, what are the other implications? Zest says “our big data underwriting model provides a 40% improvement over the current best-in-class industry score. That translates into more accurate credit decisions, which leads to increased credit availability for borrowers and higher repayment rates for lenders.”
All of which means that the economy that helps keep your business going flows that much more smoothly — and accurately. And as it flows, let AVPS help you process those payments, however they’re coming in to you.
Even if it’s via the same mobile phone number your customers have kept for years.