Alternative ways to score consumer credit worthiness in the global Underbanked market



By Bernard Lunn

Fair Isaac Corporation, which invented the FICO score, was founded way back in 1956. The FICO score was one of the great Fintech innovations before the term Fintech was coined and the company is now publicly traded (symbol is FICO of course), with a market cap over $2.8 billion.

FICO invented the credit score business and they dominate it today. Of course that means that entrepreneurs look for windows of opportunity to break into this huge market.


There are two basic opportunities – in the West and in the Rest.

In the West there are about 25% of consumers who are no file or thin file. 

That is a big %. The assumption that the market makes is that all 25% are bad credit risks (“deadbeats” in common parlance). That is a faulty market assumption that leaves an opportunity in these cracks in the market:

  • Professional Class Immigrants. They arrive in a new country with assets back home and a good job in the new country and…no credit history in the new country.
  • Too rich to bother with credit scores. Private Bankers serve this niche quite well. Collateral in Custody is the lender’s protection.
  • Divorce or death of spouse who had the credit history.I assume there are legal ways to avoid this problem but people going through a life trauma may not be super diligent on paperwork.
  • Students. Some parents teach their kids how to play the system (get a credit card and use it a lot and pay it back 100% each month). Some parents don’t do this and some kids reject the advice as stupid grown up stuff. The much bigger issue is students without rich parents who pay for their own education by going into debt.
  • Ambitious Entrepreneurs. Most entrepreneurs fall into the 25% category for a while (particularly if bootstrapping) and either end up in the too rich to care category (if the venture succeeds) or slowly and painfully crawl their way out (if the venture fails).
  • Digital MicroEntrepreneurs. Many are first generation immigrants without a professional class job. Some may end up building a huge business. Most cobble together income from multiple digital services (Uber, AirBnB, Amazon, eBay etc).

These are the innovators we found:

  • Earnest is going after the Student market  using money raised ($299m) as a proxy for traction, they seem to be doing well.
  • PRBC. The initials spell Pay Rent Build Credit and that explains the concept. If a consumer pays rent reliably for years, they may pay a mortgage regularly as well. PRBC now also analyzes other spending. PRBC is one of 5 official Credit Bureaus in the US that is FCRA (Fair Credit Reporting Act) compliant.
  • IWOCA serves the Micro Entrepreneur market (we put that segment in both Consumer and Business Categories in Daily Fintech and the segment is attractive partly because it “falls between the cracks” that more bureaucratically oriented incumbent banks tend to ignore). We reported earlier on IWOCA here.
  • Aire graduated from Barclays Techstars in October 2014 where they got everybody’s attention with the most compelling opening pitch when one of the founders went on stage and simply said “I am a reject” (meaning rejected by conventional credit scoring). Our ranking of their pitch at the time is here.
  • Ffrees. Their approach is delightfully old fashioned and contrarian. They help people build their piggy bank to save before buying. In a way they are the anti-credit alternative. We wrote about them a year ago here.

In the Rest there are about 100% of consumers who are no file or thin file.

There is no FICO score in Africa for example. This is where a Y Combinator alum called SAIDA operate. They analyze SMS spending and receipts to underwrite small consumer loans. At their Y Combinator coming out event they claimed 8,100 loans with a default rate so far on their 30 to 60-day long loans of about 8.5%.

I call this the global Underbanked market. There are Underbanked customers in the West (a minority) and in the Rest (where they are a majority). While banks mostly fight over the Overbanked, entrepreneurs are serving the Underbanked. This is another example of Innovation coming from the excluded.

In the Rest, the distinction between small business and consumer is irrelevant because there a) is no FICO score and b) most people are entrepreneurs (albeit micro entrepreneurs). This is where a company like Kreditech is interesting as they claim to becoming profitable in a new market within 1 year (that was what I heard them say on stage at SIBOS) by analyzing earlier loans and their repayment.

Daily Fintech Advisers provide strategic consulting to organizations with business and investment interests in Fintech.


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