FICO, LexisNexis and Equifax Admit to Inaccurate Credit Scores for 15 Million Consumers: Why the Democratization of Data for the Underbanked Spells Disaster for Legacy Credit Reporting Agencies
24.7 million FICO scores are sold each day, according to the home page of the Fair Isaac Corporation. Last week they, LexisNexis, and Equifax announced they have joined forces on a new credit scoring system using alternative data that should make it easier for the underbanked to prove their creditworthiness.
They had to do something.
Consumer habits have changed and non-bank lenders, backed by substantial investments are eager to gain competitive advantage by exploiting data and insight to bolster portfolio margins.
As alternative finance players seemingly spring up overnight with new ideas, new capital, and new decisioning strategies, these stalwarts can plainly see their future is grim. While a press release may tout “new” access to credit for more than 15 million consumers, what it really means is 15 million consumers were previously inaccurately scored, and they now hope to charge as much as $19.95 per report to paint a better picture.
The company revealed that its data scientists have found alternative data - such as property records, telecommunications, and utility information - is useful for scoring these consumers.
The telecommunications and utility data, for instance, shows that unbanked consumers, who make regular, on-time payments to wireless carriers, may be credit-worthy and reliable customers. The firm says it is now using data from LexisNexis and Equifax to give 12 of the largest credit card issuers a new reason to extend credit to millions of new customers. The company says the pilot is likely to be complete in the next few months, following which it could extend the service to more firms.
Forbes contributor Nick Clements is the first into the fray attacking the lending industry’s reliance on FICO's antiquated models. I predict an onslaught of negative sentiment around these old model risk assessment metrics, and new energy from startups such as Kreditech, Lending Club, SoFi and ZestFinance who, either directly or indirectly, are eating into the company's market share by offering big, data-driven, credit-scoring models to help banks and P2Plenders not only extend credit to the underbanked, but also automate the underwriting process, enabling instantaneous credit approval. The age of the traditional proprietary scoring model is ending, and the age of the data-driven scoring model is here.
What Should I Do?
We are still operating in a FICO-dominated world for the time being. The first step in taking control of your future and access to credit is to understand how the system works, what options you have, and what impact your personal financial decisions (and habits!) have on the outcome. If you have a strong credit score, you will have the greatest number of choices. For now