Could FinTech Lending Move Beyond FICO?
Nate Matherson recently wrote about FinTech trends to watch for Business.com. In his article he predicted that more companies would soon be moving away from using (or at least putting as much emphasis on) FICO scores. However currently more than 90% of lenders use traditional credit scores as part of their process for approving borrowers. So could that change?
Admittedly it does seem slightly odd that companies that pride themselves on algorithms and data sets would be so beholden to any one factor. For example alternative small business lender OnDeck boasts that it uses over 2,000 points of data to approve their borrowers but applicants must still have a minimum score of 500 to be considered. However it is important to remember that a lot of data goes into a FICO score as well.
The largest factor in a FICO credit score is also what lenders are often most concerned with — payment history. Other factors include the amount of revolving credit available, length of credit history, the type of credit used (A.K.A. “credit mix”), and new credit. Additionally each of these factors are weighted according to FICO guidelines… which is exactly why FinTech lenders could likely develop a better system. In fact marketplace lending leader Lending Club already factors in some interesting data points, including how fast a form is filled out, what time of day/night an application is submitted, and what email address is used on the app.
Although FICO scores may be the easiest tool for lenders to partially base decisions on, there could be a growing need for FinTech lenders to disrupt the credit reporting world as they have the banking industry. As Matherson points out many Millennials are bucking traditional credit building techniques that could hurt their FICO score but doesn’t make them less creditworthy. In fact many of young professionals may have stable employment and no debt but still not be eligible for most loans.
Instead of using straight FICO scores for gatekeeping perhaps FinTech lenders could start incorporating larger credit report data into their algorithms. This would allow them to give more value to common sense factors like having steady income or paying on time while de-emphasizing some of counter intuitive rules and quirks of the FICO scoring system. San Fransico-based lender Earnest has taken this approach (using a reported 80,000 to 100,000 data points) and seen great results so far.
Ultimately it would make sense for more FinTech lenders to start moving away from FICO scores and begin embracing other methods of determining creditworthiness. In fact doing so could very well be the next step in enhancing credit availability. So perhaps it’s only a matter of time before we see FinTech going FICO free.