Affordable credit is a necessary requirement for economic growth around the world. However, the global financial services industry loses out on hundreds of millions (if not billions) of potential customers from major portions of the global consumer market due to incomplete or incorrect credit scores. For example: Millennials who choose not to use credit cards, working class adults who live paycheck to paycheck with no savings accounts, new immigrants without local credit histories, or entrepreneurs without fixed sources of income. These folks may all be considered ‘underbanked’ or ‘underserved’, and may consequently be blocked off from traditional financial services. A major reason for this is that traditional credit scoring practices are based strictly on credit bureaus and credit histories. On the other hand, emerging models of alternative credit scoring have become available in recent years, opening new opportunities for the 2 billion underbanked borrowers worldwide and the many thousands of consumer banks and lenders who can service them.
While used by approximately 90% of US lenders, for example, FICO scores are either unavailable for some 40 million people, or have material errors in as many as 1 out 5 cases! Moreover, many lenders realize that prior credit history is just one of many data sources that can be used for determining an applicant’s level of credit risk, and that a blanket score based only on past financial history can leave them with a limited perspective.
Alternative credit models may offer a solution. LendingTimes.com reports that alternative credit scoring models have shown promise in recent years, by analyzing expanded information, such as utilities payments and mobile phone behavior data. And yet, most alternative credit approaches are still focused on financial-based information. Another approach that has gained recent recognition is personality-based credit scoring. Personality-based scores can complement a financial credit score by tapping key character traits that are important for good borrowers’ behaviors, such as responsibility, accountability, and trustworthiness. In doing so, character-based scores can assess a borrower’s “willingness” to repay their loans, above and beyond their financial “ability” to repay. Indeed, evaluating credit in this way, brings back much of the “human assessment” that is often absent from online lending platforms.
One of the most effective methods to assess personality is psychometrics. Backed by thousands of studies in applied psychology, and used by most Fortune 500s for talent assessment, psychometrics is a theory-based science for assessing character traits, and predicting future behaviors. Psychometrics often takes the form of interactive questionnaires that produce an assessment profile based on responses. Unlike big data or social media approaches, psychometrics measures these traits directly, does not require personal identifiers or private information, and does not need to access third party data sources. As such, no one is unscorable.
Furthermore, the best psychometric tests are non-biased against demographics groups, and have safeguards to prevent and detect gaming the questions. The latter is usually achieved by analyzing patterns of responses and response times to questions regarding behavioral preferences that have no correct answers per se.
One leading provider of psychometric credit scores is Innovative Assessments (IA). IA’s credit scores are based on a short 3-5 minute questionnaire that is seamlessly integrated with lenders’ platforms, and is not limited by geographies or demographics. IA has seen impressive results in 13 different countries, with significant lift to lenders’ financial-based credit scores, and ultimately helping them approve over 20% more loans, particularly among the underbanked.
Indeed, this complementary approach to credit scoring can have far reaching implications. Psychometric credit scoring solutions offer not only improve lenders’ financial-based credit scoring models, but also open an opportunity for responsible and potentially valuable customers again access to affordable credit. In the end, this will help to facilitate financial inclusion, and economic growth for all involved.