![]() credit bureaus appeared in the 19th century to help local merchants determine which customers were creditworthy. As the CFPB summarizes in an excellent report, the first U.S. What’s in a FICO score?īefore we discuss new developments in credit scoring, it’s helpful to review some history. For fintech entrepreneurs considering how to innovate in consumer underwriting, we think it’s important to understand how the current credit reporting system works, what new ideas might fit well within that system, and when it makes more sense to bypass the current system altogether. Some new data sources being furnished to credit bureaus lack a home within the bureaus and could even end up degrading FICO’s usefulness. However, we worry that recent “innovations” in some corners of the credit scoring ecosystem may have less salutary effects. It turns out that consumers who view their credit reports tend to make fewer late payments and are less likely to enter delinquency. We believe that “the Credit Karma effect” has been a net positive for the U.S. However, CK was arguably the first mass-consumer product to allow individuals a look under the hood of how their FICO score was determined and what tactical steps were necessary to improve their credit rating. To be clear, Credit Karma didn’t change credit scoring. ![]() So, what’s the catch? Not much, unless we take a step back and analyze what a material change Credit Karma catalyzed in consumer credit scoring. Lenders, in turn, are able to prequalify individuals through review of the credit profile or demonstration of good behavior. Customers are offered better financial products (lower fees and/or rates) versus what they have today. Selling consumer leads to lenders is a win/win. Monetization of such a service is brilliant. Its business model is relatively simple: attract consumers through a real (and free) value proposition of improving one’s credit. One of the biggest successes in fintech’s brief history is Credit Karma.
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