As banks recovering from the financial crisis look towards lending to people with sound credit histories, those who don’t have a history of borrowing find themselves turned away. Freddy Kelly is co-founder and CEO of Credit Kudos, an alternative data platform for the credit industry. He talks to FHEx about the problems in the credit based lending market, and how fintech can alleviate the struggles of borrowers that don’t fit into the standard criteria. Credit Kudos also joined us at our recent event, Building Financially Healthy Communities in Manchester. You can find their presentation here.
With most of the excitement around financial technology, or ‘FinTech’, centred on enhancing existing practices be it smarter investment options from Nutmeg, or cheaper FX with TransferWise I wanted to bring attention to the huge potential to enhance the lives of the most financially vulnerable, who care less about restructuring their portfolios than they do paying rent on time.
Credit scores, whilst not making the most exciting dinner table conversation are critical to accessing finance; whether it’s a new mobile phone contract or a mortgage on a new home. When asked what their score is, most people respond with blank looks and a shrug of the shoulders. This is probably fine if you’re lucky enough to be in the ‘prime’ range, i.e. with a score in the upper 50%. If, however, you find yourself in the less desirable ‘subprime’ bracket, you’re likely to be rejected by highstreet banks and building societies and turning to the services of payday and doorstep lenders. Approximately nine million people are stuck in this latter group, forced to resort to high cost creditors through no fault of their own.
So how are credit scores computed today, and more importantly what can the FinTech world do to improve matters? The U.S. FICO model of credit scoring we’ve adopted in the UK looks at five major factors: repayment history, outstanding balances, length of credit history and credit appetite and product selection (i.e. how often you apply and which products you’re using). It’s easy to see a glaring problem for a first time borrower (chicken, egg anyone?). Equally jarring is the requirement for a deterministic income source and fixed address, two things many of us are without. Credit bureaux are opaque, cumbersome, inflexible and inaccessible. So how can we measure financial health in a fair way that’s accessible to all? Credit Kudos – an alternative credit scoring platform – is trying to answer that exact question. Instead of taking a broad strokes approach, digging up historical performance, we source fine grained spending information direct from you, the borrower. This rich source of knowledge allows us to build up an accurate picture of your financial behaviour that you can use when applying online. We don’t expect you to have borrowed money in the past and don’t penalise you because of your postcode or any other irrelevant factors. All we care about is how you manage your money.
We started piloting our service with a select group of financial institutions this year and hope to grow that number over the coming months. There’s lots of work to do and we’re only just getting started. If you’ve been affected by some of the problems we describe, work with individuals who find it difficult to access mainstream products, or have ideas you’d like to share then we’d love to hear from you: firstname.lastname@example.org
Read more about Credit Kudos and how they are taking on the credit scoring industry.