January 22, 2019

An Ecosystem of Innovation: The Case for an Alternative Credit Scoring Partner

By Michele Tucci, CredoLab Chief Product Officer

If you have followed the rise of alternative credit scoring over the last several years, you may have noticed that these solutions are by and large led by new technology players. While some credit bureaus and banks are indeed innovating in this space, they are generally doing so at their own speed. Others are operating from the position of a facilitator, such as VISA’s initiative to optimise the credit card funnel through a co-creation program that brings together multiple partners for a seamless experience.

The main reason that the cutting edge of alternative credit scoring is driven by new players is that the focus of banks and credit bureaus is on their proprietary scorecard and fine-tuning the crunching of traditional data sources. But the fact that they did not pioneer alternative credit scoring does not preclude them from taking advantage of its benefits, which includes tapping into new markets of underserved borrowers, improving the accuracy of their credit scoring, and increasing their revenue from loans and other financial instruments.

Naturally, there is a bias against working with external technology partners, be they for alternative credit scoring, know your customer (KYC), income verification, or other product needs. The prevailing myth in any tech-enabled industry is that companies must fight to develop all their technology in-house.

Just take a look at Apple. The company procures some of their hardware from competitors, outsources manufacturing to Foxconn, and sells their devices at certified Apple resellers across the globe. To wit: Even the most valuable company in the world and continuously heralded as one of the most innovative relies on a much larger ecosystem than people assume. Smart companies realise there is an advantage in finding the right partners in areas outside of their core competencies.

The same holds true for credit scoring. The banks progressive enough to tap alternative credit scoring solutions from partners - such as TD Bank in Canada, which even pairs it with predictive virtual assistants for incredible customer experience - have experienced an exponential leap forward. As data sources are more varied than traditional financial information, spanning social media, telco, psychometric, and device data, banks can gain new customer segments from among the underbanked, such as students and new-to-credit.

The Gini Coefficient - which measures the predictive power of their scorecard - also rises. Credit scoring solutions built on anonymised device data can raise the Gini Coefficient by as much as 30%, and the difference in even a single percentage point can save up to US$10 million for every 1 billion in underwritten loans, according to a report from McKinsey. The banks bold enough to turn to alternative credit scoring solutions, in short, are rewarded with gains well worth the initial leap.

Banks face the same challenges as incumbent players in other industries. As much as they realise the benefits of partnering with tech providers creating cutting-edge solutions, there are first obstacles in the internal environment to overcome. Some internal stakeholders may be against the idea of working closely with partners as a matter of general principle, while others will have more granular concerns, such as security, data privacy, cost, or timeliness.

If it takes visionary leaders to create game-changing products, it requires as much vision to realise the need for technology partnerships and convince others in the company to see it as well. These internal champions have an arduous task ahead of them, and the larger a company is, the more difficult it will be. Fortunately, the message will be the same no matter how big the company is: The right technology partner can reduce costs, accelerate speed-to-market, and most importantly, enable the company to focus on its core competencies.

The business environment is also on the side of every would-be internal champion, as demonstrated by the Monetary Authority of Singapore’s (MAS) recent announcement of a set of principles to promote fairness, ethics, accountability, and transparency in the use of artificial intelligence (AI) and data analytics in finance. The business environment, in short, is rapidly shifting due to technologies like AI and machine learning, and it’s happening right under our feet. Companies need technology partners to navigate into this unknown and emerge in every sense a pioneer.