Credit Scoring 3.0
Leasing, financing or simple commercial credits are now part of the standard repertoire of many financial institutions and companies. They offer customers financial planning security and flexibility through maturities, even for cost-intensive purchases. Although these financing models increase the conversion rate on the part of lenders, they are often associated with risks. This is one of the reasons why banks and companies must be able to protect themselves against negative scenarios such as non-payment or fraud. Since own customer information and payment histories are not sufficient, external data sources are often used. The classic approach to credit agencies helps lenders to assess the creditworthiness of applicants. But this alone is not enough. Data must first be condensed and analysed on the basis of external information in order to be able to make a transparent and selective decision.
Challenges in the “classic” application process
At the same time, customers expect the application process to be as uncomplicated and fast as possible. This often poses a challenge for companies and lenders, as many non-automated process steps exist in practice. This is the case, for example, when additional documents or bank information must be obtained. Manual actions prevent automated application evaluation in real-time and are not compatible with a modern digitisation strategy. In addition, there are potential conflicts with regard to the timeliness of external creditworthiness information. Although external data providers always pay attention to the quality and timeliness of the data, it is not always possible to ensure this for every application.
New innovative approaches to risk assessment through open banking
But what is the alternative? A look at the current “Payment Service Directive 2” (PSD2) reveals the innovative approaches that are possible through open banking. The new directive enables consumers to grant third party providers access to their account. Banks, in turn, guarantee access by means of an appropriate interface. In terms of credit applications, this means that lenders will be able to carry out a risk assessment by taking a digital look at the account. For online credit applications in particular, the digital account check has already proven to be a suitable tool for making real-time decisions without media discontinuity. While documents such as account statements, bank information or salary statements have so far had to be forwarded and evaluated separately, this can already be done with the customer’s consent via a digital account view. The process is traceable and can be easily integrated into the digital process landscape. After the applicant has provided his or her legitimation data, the quantitative and qualitative real-time evaluation of the account movements can be carried out. A categorisation of the transactions allows the lender to draw conclusions on several questions:
- Identification: can the applicant be assigned to the account?
- Is there a regular income?
- Is a positive account management recognisable?
- Are there signs of negative payment behaviour (e.g. returned direct debits)?
- Which turnover categories can be identified (e.g. existing credits)?
Advantages of the digitised application process
The enriched information can then be used for own score and budget calculations. The advantages are obvious. On the consumer side, a fast processing time can generally be expected. In terms of data protection law, only the data that has been released for processing is used. Moreover, there is no need to apply for and submit additional paper documents. Conversely, for the provider this means the elimination of manual verification steps and a significant reduction in the susceptibility to errors. Depending on the application, the digital account view can even be a suitable alternative to the classic credit rating score of the credit agency.
In the end, anyone wishing to consistently digitalise their application processes should observe new approaches and examine possible fields of application. Risk management in particular benefits from current developments in open banking and XS2A.
If this article has aroused your curiosity and you would like to learn more about Credit Scoring 3.0, please feel free to contact us directly or watch our On Demand Webinar on “Credit Scoring 3.0 – how open banking and the digital account view create a new scoring model” (together with our partner FinTecSystems).