For a long time, credit scores have been the backbone of the financial industry in Canada. Using our past credit history, banks and other lenders have attempted to predict our ability to meet payment obligations before approving us for a credit product such as a credit card, loan or mortgage. Recently, credit scoring has reached beyond lending as the data collected by credit bureaus is now being used to make decisions on potential renters, job applicants and even romantic partners.
As the uses for credit scores are expanding, so too are the data sources that go into them. While banks and more traditional lenders may still rely heavily on the data they receive from credit bureaus like Equifax or TransUnion, modern lenders consider that data just a starting point and Canadians are poised to reap the benefits.
A traditional credit score is dependent on how a consumer manages the debt and credit they have taken on. Regular repayments contribute to a high credit score, while defaults, delinquencies and bankruptcies have a negative impact. The result is a linear rating: a high credit score deems you worthy of credit (or an apartment, a job or a date) and a low credit score suggests you are not. As essential as these scores are to the individuals they belong to and the financial system that depends on them, they are far from perfect. At a high level, like the fine print on an investment prospectus, past performance is not necessarily indicative of future results; the model is particularly ineffective at predicting the creditworthiness of someone with little or no credit history; and, as large scale data repositories collecting information from sources as disparate as big banks and rent-to-own furniture stores, credit bureau data is very much subject to error. In the United States, the FTC found that one in four Americans had an error on their credit file.
The good news is that change is coming and it’s coming fast. Innovative new lending startups like Borrowell, Merchant Advance Capital and, of course, Progressa have started in part because the emergence of new data sources has allowed us to evaluate creditworthiness in ways that were not previously possible. As more and more transactions and interactions occur online and on our mobile devices, consumers are openly generating thousands of data points that provide insight into their lives. This data is often easy for consumers to share, offers a more comprehensive profile of their creditworthiness and can be evaluated almost instantly by underwriting algorithms.
When the age of loyalty programs and reward points began to hit its stride in the early 90’s, personal data became a commodity. Consumers happily shared their personal spending history with retailers in exchange for what amounted to a tiny percentage of their dollars spent in the form of rewards points. With the rapid emergence of the fintech (financial technology) space, our data just became a lot more valuable.
Share your data with Borrowell and you can get approved for a loan to eliminate your high cost credit card debt in a matter of minutes. At Progressa, you can use job and spending data to prove that you are in fact a low credit risk, even if your traditional credit score says otherwise. At Merchant Advance Capital, your business’ high rating on Yelp could help you get the small business loan you need to open that new location.
As fintech adoption grows and Canadians become more familiar with the space, we will hear more and more about the benefits being gleaned from increased access to data, amongst other technological enablers. The Bank of Canada recently weighed in on this emerging space when Deputy Governor Carolyn Wilkins opined “By working together, we can unlock the full promise of fintech to ensure a smooth evolution to tomorrow’s financial system…”
Fast and frictionless access to consumer data will play a central role in reaching that promise and thanks to today’s fintech startups, consumers are already enjoying the rewards.
Ali Pourdad is the CEO of Progressa.