DIGITAL DISRUPTION OF CREDIT SCORING: How developments in the credit scoring space are opening up new opportunities for incumbent lenders

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Traditional consumer lenders, like banks and credit unions, have historically served segments of the population they can conduct robust risk assessments on. 

But the data they collect from these groups is limited and typically impossible to analyze in real time, preventing them from confirming the accuracy of their assessments. This restricts the demographic segments they can safely serve, and creates an inconvenient experience for potential borrowers.

This has hobbled legacy lenders at a time when alternative lending firms — which pride themselves on precision risk assessment and financial inclusion — are taking off. These rivals are starting to break into a huge untapped borrower market — some 64 million US consumers don’t have a conventional FICO score, and 10 million of those are prime or near-prime consumers. 

Incumbents can get in on the game by tapping into new developments in the credit scoring space, like psychometric scoring, which use data besides borrowing history to measure creditworthiness, and by integrating new technologies, like artificial intelligence (AI), to improve the accuracy of conventional risk assessment methods. There are still risks attached to these cutting-edge methods and technologies, but if incumbent lenders are aware of them, and take steps to mitigate them, the payoff from implementing these new tools can be huge.

In a new report, BI Intelligence looks at the drivers encouraging incumbent lenders to consider adopting new credit scoring methods or innovative technologies that make the lending process more seamless. It also outlines what incumbents stand to gain from adopting alt scoring, the types of models on the market to choose from, the risks still appended to onboarding them, and recommendations on how to mitigate them to add real value to legacy lenders’ businesses.

Here are some of the key takeaways from the report:

• Alternative lenders are disrupting the credit scoring space in two key ways: by using alternate credit scoring methods and integrating new technologies.
• There's a range of methods and technologies incumbent lenders can choose to implement. But the solutions that are best suited for a particular lender will vary based on its specific business needs, the demographics it aims to attract, and its jurisdiction's regulatory landscape.
• If executed correctly, the payoff can be huge for incumbent lenders. In addition to boosting financial inclusion and enabling lenders to tap into new demographic segments and markets, new methods and technologies can improve returns on existing demographics.
• However, disruptions carry both short- and long-term risks that both fintechs and incumbent lenders must navigate. These include inbuilt biases, fraud, conflict with third-party data policies, and poor financial literacy among underserved demographics.

In full, the report:

• Outlines the drivers behind incumbent lenders' growing awareness and adoption of credit scoring disruptions.
• Looks at the current range of methods and technologies changing the face of credit scoring.
• Explains what incumbent lenders stand to gain by adopting these disruptions.
• Discusses the risks still attached to these disruptions, and how incumbents can manage them to reap the rewards.
• Gives an overview of what the credit scoring landscape of the future will look like, and how incumbents can prepare themselves to stay relevant.

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