Where next for credit risk scoring?

The way credit scores are calculated could be set to change as new and novel ways of assessing ability to repay come to the fore.

An evolution in this area is perhaps due. Credit and loan applications are generally still assessed on factors such as payment history and existing debt. Evidence has to be gathered to arrive at a score. Yet, in today’s digital age would-be borrowers continually generate huge quantities of behavioural and lifestyle data online that can provide indicators to creditworthiness and ability to repay. This can be useful to credit risk scorers.

These new data sources can complement established ones and, in time may provide an alternative route to a credit decision.

The Wall Street Journal reported recently that lending startups have begun using information from the smartphones of consumers in the developing world. The information, gathered through an app, can help them arrive at a lending decision.  

Innovations like this could be instrumental in helping to reach the underbanked who, due to lack of infrastructure and access to supporting evidence needed by a credit or loan application, may be unable to secure funding through traditional means.

This could be good news for applicants who are currently denied credit but who are in fact viable prospects and would meet repayment obligations. Provided risk assessment is robust, this benefits both borrower and lender. After all, the micro business of today could deliver the innovation of tomorrow.

As the way we live our lives changes, so too must the way services that support society and the economy evolve and adapt. Complementary and alternative approaches to assessing credit risk are innovative and take many forms.

A Chilean start-up this year won the BBVA Open Talent 2015 Special Financial Inclusion Award with an approach that looks at evidence of where an applicant meets regular payment obligations such as utility bills.

In this digital age the data, tools to mine and analyse it and the capabilities to act on the results exist and provide the potential to improve and speed up risk analytics and decisioning. Through financial technology solutions, modern approaches to risk assessing could help pave the way for more credit and loan approvals while maintaining or improving upon a profitable level of risk.