“Not everyone has a credit score, but everyone has a personality type”

unnamedBig data lends new Zest to banks’ credit judgments

By Patrick Jenkins



When Douglas Merrill left Google, he made the kind of move into financial services that many believe the tech giant itself may one day make.

Mr Merrill, the internet group’s former chief information officer founded Zest Finance to develop a simple theory: that consumers’ online behaviour can be a decent proxy for their reliability in managing money. “All data is credit data,” he once told the New York Times. “We just don’t know how to use it yet.”

Zest is one of a fast-growing coterie of financial technology companies – “fintech”, to use the jargon – that are aiming to revolutionise the way banks and other financial services companies operate.

Talk of fintech investment is all the rage these days, as banks try desperately to focus attention on a positive forward-looking agenda, and draw a line under the legacy woes. This is partly spin, of course. But investment in technology is also genuinely needed after seven years of crisis and post-crisis regulatory reform that distracted focus – and funding – away from the pipes and cables that make everything work. Who knows? Done right, it could even help prevent some of the scandals of the past. And, as with so much in the mass market internet world, it can claim to be an agent of democratisation.

Zest and companies like it claim that many people who have traditionally been denied credit – either because they lack a record of previous borrowing, or because that record is bad – will be validated by their broader approach to credit scoring. By using “big data” records sourced from individuals’ social network and internet footprints, typical credit scores can end up 40 per cent higher, Zest says.

That could be good for the lenders, who can take on more business with less risk of default, and good for the borrowers, who want the money. This data analysis can be particularly powerful in emerging markets, where families may need more money than they have to hand to school their children or start up small businesses – both vital investments for macroeconomic development.

Admittedly, some of the data mining that fintech companies carry out makes liberty campaigners jittery. On balance, though, it is refreshing to see new ideas being brought to the traditionally obscure process of granting consumer credit.

And if big data gives the industry a second leg to stand on, a third innovation is emerging from another oblique angle – and appears equally promising. A Shoreditch business called VisualDNA has been gaining rapid traction for its credit scoring of loan applicants through a form of psychometric testing.

“Not everyone has a credit score, but everyone has a personality type,” argues Alex Willcock, the company’s founder.

VisualDNA’s test, administered via a lender, is relatively quick, taking 10 or 15 minutes. The bulk of the questions ask applicants to choose pictures from a selection that can reveal their attitude to types of risk. For example, one offers pictures of a preferred leisure activity: a day out with the family, a night out partying, or a good book?

The company’s technology has been up and running for a couple of years in Russia, via Svyaznoy, a phone retailer-cum-bank that is controlled by VisualDNA investor Maxim Nogotkov. Among the dozen or so lenders that now use the tests across half a dozen countries, some report improvements of as much as 50 per cent in loan default rates. As a result, credit scoring agency Experian and credit card company MasterCard both signed up as clients, and banks in South Africa, Turkey and Mexico are about to trial the tests.

Mr Willcock is not lacking ambition. He talks about targeting 30m borrowers out of a 1.9bn “addressable unbanked” market over the next few years.

There are some practical shortcomings – some pictures are open to interpretation, and some applicants may dodge safeguards designed to spot dishonest answers. At a macro level, too, there will be concerns. Improperly used, this kind of “fintech” could further inflate the credit bubbles in many markets to unsustainable levels.

But, like it or not, technology is the future. The world is not going back to the old order of a bank manager knowing each of his customers individually and making credit judgments on that basis. Big data and psychometric tests have the potential to replicate the personal touch, and ensure lenders know more about their customers than they ever used to.

In recent years, amid money laundering scandals, the bank maxim of “know your customer” has become all about regulatory compliance. But it should also be about making decent business decisions.

Patrick Jenkins is the Financial Times’ financial editor


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