I moved to the UK three years ago, and was very surprised by the importance of my credit history in my everyday life. From renting an apartment to getting a phone I could use abroad, everything was blocked or made more expensive by the nonexistence of my credit history.
Fast forward to now and I have just been approved for my first credit card, albeit one with a very low credit limit and high interest rate.
Being a successful entrepreneur, I’m privileged enough to get through these hurdles with spending power. But there are a lot of people for whom it’s much harder.
Offering credit is no longer a matter of credit scores on their own: it’s about customer data analytics. Machine learning opens up new opportunities to process the enormous volume of data we generate in our digital lives and use this to make better decisions more quickly. Let me explain how the system has been operating so far.
So What’s the Problem?
Pretty obviously, companies who issue credit or services paid for in spheres like utilities or mobile phones, want to know if you’re going to pay. So, they club together and share information to credit reference agencies (CRAs) like Experian, TransUnion and Equifax about our payment habits and use it to make lending decisions. These CRAs layer on public datasets like the electoral roll and the insolvency register (bankruptcies).
The same happens the world over, to a greater or lesser extent.
Lenders can’t use this bureau data when processing applications for new customers unless they also share information about their existing customers to the same bureau. Different lenders might create their own credit score or algorithm for whether to lend, but essentially they all have access to more or less the same data.
So when I first applied for credit in the UK, my credit history was invisible. All my historic borrowing was in Ukraine, and no UK lender is looking there for credit decisions. The same would be true for anyone new to the UK, or someone from the UK new to credit.
How to Disrupt the Market
Firms need to be hungrier for data and more skillful in using it to enhance decision-making. Specifically, two categories of data are under-utilised in the UK and are ready to be exploited.
Firstly, Open Banking can allow lenders to see an applicants’ current account transactions, and applicants are increasingly willing to give it. Proper categorisation of transactions can really help to understand customer lifestyles and, crucially, shine a light on how affordable credit will be.
Secondly, lenders are ignoring the massive amount of data that resides on customers’ mobile devices but that is, again, indicative of lifestyle and behavior.
Lenders who can harness the power of these datasets, together with credit histories, using AI to build much more sophisticated credit models and deploy them far more rapidly, will be able to lend to customers who, like me, don’t appear to have a credit history. They’ll also be able to offer lower rates to customers with credit histories because they can make better lending decisions.
So, don’t get too obsessed with your credit score. Get ready to share your current account and mobile phone data – that’s the future of credit decisions.
By Misha Rogalskiy, CEO at The Credit Thing.
The Credit Thing was previously known as Koto Card. The company wants to bring social graph scoring and other new credit risk assessment methods to people with a thin or no credit history.
Rogalskiy is also co-founder of the Ukrainian mobile-only bank, monobank, established in 2017.