Recently, it came out that Movenbank, a start-up financial services company, launched something called the CREDscore in private alpha. Movenbank wanted to use this CREDscore as a creative way of determining creditworthiness, or…something. Unlike your FICO score, CRED would take into account a customer’s social network and, literally, their Klout score. They detailed it in a blog post (now deleted) like this, by telling the story of a man named Ashely who has lots of LinkedIn contacts:
Then there’s Ashley. Ashley’s a bit older than Matt and Jessica, but he lost his job a few years ago. Then he lost his house. Ashley’s suffering. The bank foreclosed and now he can’t get any opportunity to get new things started.
But he has an idea. He wants to launch a new business that makes funky trainers that tweet and check-in on foursquare as you run.
Sounds stupid, but don’t be fooled. According to LinkedIn, Ashley has a heavy influence on some potential investors who are sniffing around the ‘Tweener,’ as he calls it. The only thing is he has a problem. The mainstream financial service providers don’t want to know him.
Here at Movenbank though, we love Ashley.
We love Ashley because we can see he’s on the cusp of a breakthrough. But we can’t just give Ashley all the things he wants, so we offer him a deposit account and a limited loan facility to get the business started. The loan facility increases over time, as his Klout increases.
Now Movenbank has made it clear that CRED is not a credit score, but a means of tracking financial (and social?) well being, and rewarding customers for “spending, saving and living smarter.” It’s all very vague and confusing, and it would seem that they haven’t quite figured it out yet.
But it’s no longer a means of assessing credit. Sorry, boy named Ashley, whose life was already difficult enough: your Klout score has been built for naught. Movenbank’s efforts might seem silly, but they speak to a real need for novel ways to assess credit. Millennials are buying cars and homes less. They grew up with debit cards as an alternative to cash — not just credit cards. And most importantly, they’re loaded down with student debt — none of this adds up to a good FICO score, to say the least. And, indeed, Millennials have credit scores well below the national average. Should lenders want to bring young people into the fold, they might have to think differently about what makes someone creditworthy.
Last decade, lenders toyed around with bringing in alternative credit scoring data, too. Rental payments, utility payments and even Nielsen data were pulled in to add to the profiles of those with “thin credit,” as detailed in this Consumer Affairs piece.
According to the story, new consumers, especially Hispanic immigrants, were less likely for both cultural and logistical reasons to have robust credit profiles, and it was lenders’ job to jockey for the ability to lend to them and others. FICO acknowledged when it rolled out its FICO Expansion that “US lenders are competing ever more fiercely for the same set of consumers, resulting in eroding profit margins and reduced shareholder value,” according to Consumer Affairs. This was back in 2004, our economy was growing, fuelled in large part by cheap debt.
But 2012 isn’t 2004. Lenders aren’t competing to pump more debt into a rapidly inflating bubble. Generally speaking, America is deleveraging, and lenders have learned their lesson. In a recent blog post by FICO, on its Banking Analytics Blog, the company specifically singles out social media data as a bad source of alternative credit scoring data. The company explains what makes for the best sources of alternative credit data in bullets [emphasis ours]:
• Nationally representative and robust; not just the Mid-Atlantic states, for example
• Consistent and dependably accurate
• Objective and free from personal bias; not social media, for example
• Unique new independent data that is supplemental or complements that which is in a traditional credit report
• Predictive, so that matching it with performance data or other data elements produces a provable and useful correlation with target behaviour
• Operational and regulatory compliant, so it can be used by a lender to influence a credit decision
Unlike the almost binary data provided by something like Pay Rent, Build Credit (PRBC) — i.e., a boy named Ashley pays his rent on time/a boy named Ashley does not pay his rent on time — social media provides nebulous and easily manipulated data. How do we know that Ashley hasn’t just made it appear that he is friends with a lot of influential people by, say, putting a picture of a pretty girl on his profile (he’s already halfway there…).
Movenbank, by doing away with its Klout-based score, will join FICO in its scepticism over social media data’s ability to assess creditworthiness. That’s probably the wise thing to do, but it’s too bad for Millennials — social media might be the only thing we’re good at. Perhaps the alternative data that FICO toyed with last decade will need to be brought more front and centre than traditional credit scoring currently allows. Or perhaps Millennials will forever be a bit less leveraged than the previous two generations.
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