April 27, 2018

Over the past three weeks, I have talked about how the Senate may eliminate FICO’s monopoly on government-backed mortgages, as well as the some of the problems with the current credit scoring industry and methodology. All past issues are available here.

The “legacy” model for determining financial responsibility/credit worthiness is very easy for consumers, though opaque and unfriendly. It is all for the benefit of the corporations and credit bureaus selling your information. Consumers have no real control over what information is bought or sold or where it comes from, and correcting false information can be time-consuming and difficult. In addition, tens of millions are left out of the current system and can’t or don’t want to opt-in.

Are there any alternatives?

Somewhere Over The Rainbow, Consumer Financial Ratings Are Transparent, Accurate, Private, And Accrue Value To The Consumer
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The more transparent alternative to this model is a consumer-controlled personal database. This would allow the consumer to own their personal data, and govern access to their data with known entities for specific purposes. This structure would also create a mechanism by which the consumer could monetize their own data rather than the bureaus capturing all the revenue. Consumers would also be able to ensure accuracy of the data.

We are not far away from this being a reality, either. We can’t stay in the dry, dusty, dangerous Kansas, but we don’t need to go all the way to Oz to solve these problems. There are existing models in the marketplace that could be tweaked and merged to build this type of platform. One area with relatively low barriers to entry and years of actual live usage with millions of individuals is the financial account aggregators like Yodlee and Finicity.

Consumers are getting more used to linking their bank accounts to other software, and these existing services can aggregate transactions, account balance, and verify assets and income. Imagine a handful of APIs that pull in all the non-credit aspects of your financial life and we are very close to building the financial responsibility scoring aspect of the platform.

Financial responsibility also goes beyond just the numbers you can pull – there is real value in qualitative data (i.e., the “Character” in the 5 C’s of Credit). Being able to quantify and rate these qualitative risks – non-credit related metrics – could add additional depth to your financial responsibility profile.

An example of this in the corporate world is Sigma Ratings, a seed-stage startup focused on building non-credit risk ratings for corporations. The “legacy” credit ratings systems in the corporate world are the bond ratings from S&P, Fitch, etc. – basically a FICO for corporations. Sigma is focused on identifying, quantifying, and ultimately rating companies based on other, more operational and financial crime type risks rather than just credit risks.  Sigma shows there is a model for using data to assess and rate non-credit aspects of risk.

 

Who Am I? 24601

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One thorny challenge for financial services in a digital world is identity verification – how do you know you can trust someone you never see or interact with when everything is online and automated? A group of companies are working on this problem from multiple angles. Companies such as Civic and Sovrin are trying to break out of the username/password interface and move toward decentralized digital identities. This may even enable you to move past your government-issued identification number and finally reclaim your own identity like our buddy Hugh Jackman.

From the data monetization side, companies like Datawallet and Datacoup are building tools to share and monetize your data. Datawallet’s version is a digital wallet to store your personal data. Developers (or companies) could then interact with the data via API and the user could give the developer/company permission to get their data via the API through Datawallet.

Companies like Civic and Sovrin are giving users more control over their digital identities, and companies likes Datawallet and Datacoup provide models for how users can control and monetize their own data. Combining these ideas could enable a system whereby consumers own and control their data and verified identity, allow access, and get the benefit of their own data rather than a third-party deriving the benefit.

Another challenge will be consumer engagement – we are lazy. As I discussed last week, in general we are willing to trade our privacy for the convenience of using Facebook, etc. I believe it would be even harder to get most individuals to proactively oversee their own personal database. Over time the technology will develop where the barriers of consumer entry are low enough to gain mass adoption, but there are enough people interested in this idea today to get started testing and building.

Second, consumers may not feel comfortable proactively sharing their data. Cybersecurity firm Kapersky Lab helped with this thought experiment by launching a pop-up store that accepts only personal data as payment. In order to make the point that your personal data has real economic value, they set up a small retail store in London for one week selling mugs, shirts, and screen prints. In order to buy any of the items, you needed to give them some of the data that is already getting sucked up by your social media apps – recent messages and photos mainly. While you are sharing much, much more every day with the companies you interact with, seeing and understanding how much of your digital life is exposed to others can create some discomfort and add friction to the process as you actively have to consider the exchange of value for your privacy.

Now What?

We’ve established that the legacy credit scoring model and industry is great for corporations, and not really great for incentivizing responsible consumer financial behavior or protecting consumer privacy. This legacy model can be challenged by combining a new model of financial responsibility scoring with enhanced digital identities and privacy, ultimately enabling consumers to partake in the value of their own personal data and improving the ecosystem with more transparency and accurate data.

There are very real challenges to this new model that need to be overcome in order to be successful. However, we have never been in a better moment in time to begin building and testing a solution. We have tens of millions of consumers who have opted out or are being left out of the current credit scoring systems, as well as hundreds of millions of people who are now aware of the large privacy gaps in the current system. We have companies to partner with that have loads of talent working on overlapping and tangential problems, and plenty of traditional and non-traditional funding mechanisms to fund the development.

Consumer readiness and technological feasibility have never before been so aligned for this type of new solution.

All we need is someone to line up the resources and go build it.

Any takers?