Alternative Credit Histories
Banks and credit card companies historically have relied on FICO scores — developed by Fair Isaac & Co. — to determine a person’s credit. But some organizations and financial institutions are unseating these scores with alternative credit databases that embrace those who are unbanked, those without credit and those in traditional credit recovery.
These alternative databases rely on residential lease payment trends, utility bill remittances, prepaid card transactions at the point of sale (MasterCard, Visa and American Express branded cards available for reload), prepaid phone services spend, relationship longevity and more.
According to credit bureau Experian, almost 18 million Americans have files with too little data to yield scores, and another 17 million have no files at all. The initiation of alternative credit histories could not only benefit formerly disenfranchised consumers but also help create a new cottage industry.
Will Clients Come?
In the 1980s, FICO really took off. Its scoring helped credit card issuers target preapproved offers, and it later pulled mortgage lenders into growing their businesses, as bubble-like as it became.
“Their innovation was through scoring in that they could summarize consumers to a kind of structure,” said Ken Paterson, principal analyst at Mercator Advisory Group.
Whether new scoring organizations can succeed is sketchy, he added. “It may just be a lot of hype in the press,” he said, referring to the drop in confidence around the FICO scoring model. “The reality with most lenders is that FICO is strongly embedded in their processes,” and it is going to take some time to upset its hold on lenders in credit cards, auto financing, mortgages and home-equity lines of credit, he said.
Still, proprietary databases and analytics have been developed by a number of companies — including Experian, Equifax, TransUnion, LexisNexis, consumer-directed PRBC (Payment Reporting Builds Credit) and a number of other small vendors — to capture data that consumers have long ignored and to summarize the bits of bill-payment history that help lenders support their funding decisions.
The vicious cycle of needing credit to get credit could be broken if consumers contribute enough data to the aggregator, Paterson said. Many scoring firms already are opening their databases to include alternative data.
PRBC in the Present
New startups such as PRBC probably are “small database[s] with spotty information,” Paterson said. PRBC’s best chance for success may be in its integration with existing credit databases — that is, in its value as a supplemental resource.
“The real progress has been made in pushing out the frontier of who you can lend to,” Paterson said. “A usable score can be generated much quicker, with much less data.”
This business model moves away from an emphasis on analytics that had anxious lenders paying money in anticipation of appropriate credit extensions, just-right interest rates to generate strong revenue streams and return business.
“Where a lot of the creativity has been the in the last several years is paying for these predictions,” Paterson said.
Once companies get more exposure to the model created by companies such as PRBC and First American CREDCO, which actually has been providing merged credit reports to the mortgage industry for more than 40 years, they can improve their scoring and open loans for everyone, Paterson said.
“Today, it’s almost hard to find a consumer who doesn’t need credit — even more from a credit card standpoint than a mortgage,” he said. “Unscorable prospects with no bureau files reside on the frontier of underwriting tools, and specialized data sources and analytics are the tools of lenders wishing to address these prospects.”
Kelly Shermach is a freelance writer based in Brooklyn, N.Y., who frequently writes about technology and data security. She can be reached at firstname.lastname@example.org.