22 Sep 2017 | Posted In Thought leadership

Freddy Kelly co-founded Credit Kudos in 2015 to tackle the plight of the roughly 12% of the UK population who are “under-banked”, forcing borrowers with no credit history to turn to high cost credit. He developed Credit Kudos as a tool for using consumer transaction data to build highly accurate, transparent credit scores. Freddy will be delivering a ‘digital negotiation skills’ workshop at the Money Advice Liaison Group (MALG) Conference on 27 November 2017 and Credit Kudos will be exhibiting their alternative credit scoring fintech tool at the event.

Few people get through life without needing some form of credit, but what happens if you can’t access mainstream credit – i.e. products with fair interest rates provided by responsible lenders?

Those who can’t tap into help from friends or relatives are invariably forced to turn to high-cost loans from payday and doorstep lenders – or, even worse, enter into ruinously disadvantageous agreements with loan sharks.

Traditional credit scoring

The main obstacle prospective borrowers face is that, traditionally, they are scored by credit reference agencies (CRAs) on their repayment records; a bank account balance ‘snapshot’; length of residence at their current address; and existing loan landscape.

Such indices serve prime borrowing well, but largely fail new loan-seekers. They might include those who have amassed little relevant credit history because they are young; are not homeowners or have moved frequently; or have previously borrowed from high cost lenders (the outcome data from these providers carries little weight with CRAs). I have first hand experience of this myself.

All this is compounded by the typically dated information received by the agencies – records are routinely a month old by the time they reach them.

The credit Catch 22

Thus, a Catch 22 scenario has emerged, where those affected can’t secure credit as they have a poor credit score because of a lack of information – and can’t fill that gap without a borrowing record. The paradox increases the chances of financial vulnerability.

And it’s not simply loans for milestone events – mortgage, car, dream holiday – that are hit. An inadequate credit record can exclude people from ‘everyday’ agreements, such as mobile phone contracts or rental agreements. Obviously, such obstacles can be highly inconvenient and disadvantageous.

Missing out on eligible customers

With up to twelve million UK citizens estimated to be denied access to mainstream credit [1], it’s a big problem that also hits families, communities and the nation’s economy. Meanwhile, the consumer credit sector misses out on huge numbers of eligible customers as applicants are wrongly rejected en masse as a bad risk.

Alternative credit scoring

What is needed, then, is an alternative, highly accurate, credit scoring method that brings fair outcomes for people and assurances for ethical lenders. Together with my co-founder and CTO, Matt Schofield, former Data Scientist for Universal Music Group (UMG), we have developed what we call Financial Behaviour Scoring (FBS), a system based on continuous evaluation rather than spot-checks.

Here, instead of taking a broad brush approach, digging up historical performance, we obtain verified, up-to-date, spending information direct from the borrower. This rich seam of knowledge allows us to build up an accurate picture of each applicant’s financial behaviour – which they can use when applying online.

The Credit Kudos model doesn’t expect people to have borrowed money in the past and doesn’t penalise them because of their postcode or any other irrelevant factors. All we care about is how well they manage their money.

We started piloting our service with a select group of financial institutions last year and went on to grow the number of partnerships subsequently.

There’s still a long way to go, but more and more lenders are realising the benefits of abandoning outdated processes that are imprecise, cumbersome, inflexible and inaccessible. By enabling them to instantly and reliably establish an individual’s suitability, they are unlocking needless barriers to increased income and competitive advantage while delivering deserved benefits to the financially responsible.

[1] Non-Standard Finance plc (2016) Post-results roadshow http://www.nonstandardfinance.com/~/media/Files/N/Non-Standard-Finance-V2/reports-and-presentations/nsf-may-16-slides.pdf