18 April 2024

Empowering Financial Inclusion with Alternative Credit Scores

In the vast landscape of financial inclusion, traditional credit scoring models have long been the gatekeepers, determining who gains access to credit and who gets left behind. Yet, as the world evolves, so too must our methods of evaluating creditworthiness. Enter alternative credit scores – a beacon of hope for millions of people previously side-lined by conventional metrics.

Conventional credit scoring systems, with roots stretching back over six decades, have undeniably served their purpose. However, as consumer behaviours shift and economic landscapes transform, relying solely on these models becomes increasingly inadequate. A significant portion of the population finds themselves excluded from the mainstream credit market simply because their financial profile doesn’t fit the traditional mould. This leaves them at the mercy of an array of lenders that charge a premium for credit with devastating impact on their often desperate customers.

One size does not fit all

But there’s a revolution stirring in the financial industry. Forward-thinking institutions are embracing alternative data sources to paint a more comprehensive picture of consumers’ financial health. By tapping into online purchase histories, bill payments, rent payments, and more, these institutions are pioneering a new era of credit assessment – one that promises inclusivity and opportunity for all.

The implications of this shift are profound. For starters, it means targeted, timely and reliable access to credit, access to financial services, and access to opportunities previously out of reach. In the US for example, according to Experian, by utilising alternative credit scores, 21 million Americans conventionally un-scorable consumers suddenly find themselves in the game, with over a million of them boasting scores in the near-prime range or better. And among these newfound scorers, 1.7 million are Black American and Hispanic/Latino individuals – a testament to the power of utilising data to deliver inclusivity in financial landscapes.

Harnessing data to make a difference

Through Alternative Credit Scores powered through full access to data, Financial institutions gain access to a hoard of information, allowing them to paint a more nuanced picture of creditworthiness. Lenders can confidently extend their reach, knowing they have the insights needed to fuel business growth while simultaneously promoting financial inclusion.

The benefits of Alternative Credit Scoring extend far beyond individuals, reaching into the realm of small businesses. By considering factors like cash flow and vendor payment histories, these scores provide a lifeline for entrepreneurs seeking financing. No longer shackled by traditional metrics, small businesses can thrive, buoyed by the support of a financial system that sees their true potential.

Alternative credit scores represent a departure from exclusion and a move towards a future where everyone has the chance to achieve their financial goals.

In the US alternative credit scores seem to address that inequality but there are still precious few lenders in the UK doing the same. The increased adoption of open banking in the UK is now making it easier to include rental payments in credit scores so let’s hope that Alternative Credit Scoring starts to gain ground in the UK to reflect that fiscal responsibility can take many forms. At the end of the day, data can provide the gateway to providing financial inclusivity for people from all types of financial backgrounds – we just need to use it.

For many years I have argued that it is profoundly unfair that people who have proven themselves through years of rent payments have not been able to use this as evidence of creditworthiness when applying for mortgages. This is something that The Big Issue looked at in the early 2000s but it became clear that many private landlords would not share the information with credit reference agencies, so we simply didn’t have the data.

Steve Round

Steve Round

Founder and President

Steve has over 25 years of experience in disruptive financial services working internationally in Russia, South Africa and The Gulf.

Steve is the Chair of the Governing Board Forum of the Global Alliance for Banking on Values (GABV) and is also on the board of Centenary Bank, which is a member of GABV.

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