New Credit Scoring Means New challenges For CUS
FICO), Lexis –Nexis Risk solutions and Equifax yesterday described the details of a pilot program currently underway to examine the creditworthiness of those who aren’t eligible for credit because there is no way of scoring them under traditional models. According to the press release the pilot program allows 12 of the largest credit card issuers in the U.S. to use alternative data to identify creditworthy individuals who would otherwise be unlikely to obtain traditional credit. (http://www.fico.com/en/fico-lexisnexis-risk-solutions-and-equifax-joining-to-generate-trusted-alternative-data-scores-for-millions-more-americans-04-02-2015).
There is more here than meets the eye. For one thing I didn’t realize just how many Americans are completely off the credit scoring radar. These “unscorables” don’t engage with the banking system and therefore can’t be scored . Yesterday’s press release put that number at 15 million but this may be on the low side. No matter what numbers you rely on, what everyone agrees on is that a disproportionately large segment of this group is composed of poorer minorities who are flocking to prepaid cards.
In order to assess the credit worthiness of these unbanked persons of modest means additional data has to be mined. The pilot program announced yesterday uses information such as cable and utility bill payments. These are potential members who have so far chosen to opt out of the financial system all together. Does the industry have an obligation to aggressively court these members? I say yes. Alternative scoring models can help.
So why am I a little squeamish? I’ve talked about how “Big Data” has the ability to both revolutionize lending and create a host of legal challenges that simply weren’t anticipated when fair lending laws were passed, For example, let’s say that this pilot scoring system proves to be a reliable indicator of creditworthiness. How many years will lenders have to start using this new model without being accused of violating lending laws? After all, FICO has now demonstrated that traditional scoring systems have the effect of reducing credit to poorer often minority. credit worthy applicants and that an alternative system can be used.
Then there are the broader policy implications. Is extending credit to people who have so far chosen to live without it or who can’t afford it under traditional measures really a good thing? In 2007, on the eve of the Great Recession, America had a personal savings rate of 1.7%. Today it has skyrocketed to 5.5%which still puts us well behind most developed nations. In addition, your average 401K barely has enough in it to pay a retiree’s bus fare for his ride to his job at Walmart.
The financial industry will be devising more and more creative and accurate ways of reviewing credit worthiness for years to come. Used wisely and monitored by regulators within the appropriate legal framework, much good can come of this innovation. Conversely, right now the technology is racing too far ahead of the policy. Just because an alcoholic can pay for his drink doesn’t mean he should be having one. As a nation we are too dependent on credit and enabling the poorest among us to take on debt doesn’t seem to be the best way of encouraging thrift.
On that note, your faithful blogger is off next week to take the family on a visit to the nation’s capital and Southern Pines, North Carolina, to go to my niece’s wedding and finds some warm weather. Enjoy the holiday.