October 24, 2016
FinTech is responsible for a multitude of significant achievements in the financial services industry including the transition from a closed-loop ecosystem to an environment that encourages open innovation, collaborative efforts and partnerships between institutional players and startups.
Aside from opening minds (and pockets) of institutional players, there has been another important transformation that happened under the influence of technology companies – the way financial institutions look at customers. More particularly, the way the creditworthiness of customers is assessed.
FICO has traditionally been the lens, through which financial institutions have been looking at the customer and, in fact, still is the most important factor in weighing relationships between banks and their customers. FICO has a relatively clear structure and breaks down into five categories: 35% – payment history, 30% – amounts owed, 15% – length of credit history, 10% – new credit, and 10% – credit mix.
Aside from being heavily reliant on financial behavior, the traditional scoring tool is also working in favor of a particular part of the population – eligible, banked working class with medium to high income. FICO may be a good tool in that sense as it appropriately unlocks opportunities for those people, but at the same time, it locks out unbanked part of the population or the ones with illegitimate history with financial institutions due to low income and other socio-economic hallmarks.
If one was to carefully assess the content of each element of FICO, he/she would be surprised how heavily everything revolves around various bank accounts, amounts of funds on accounts and transaction history: amounts owed on various accounts, loans, mortgages, utilization ratio, the number of accounts, etc. Unbanked population, hence, is excluded and cannot even shed the barriers to getting a fair assessment because they cannot have a bank accou ...