The banking industry is in the midst of significant change. Unfortunately, change happens slowly when outdated thinking prevails, especially when it comes to lending. Many of the core banking systems, tools, and practices are lagging behind the times. For large financial institutions being agile and innovative can feel like an impossible challenge. However, there is one area that at least looks like it’s catching up with technology; credit scores. 

The three-digit number continues to have increasing power over our lives. It’s easy to grasp, track, and many of us can get our score through our online banking, or by downloading a credit score app. It only takes a few minutes to see just how we measure up in the financial landscape. There is a palpable and emerging awareness about credit scores and the power they wield in aspects of our lives that go far beyond borrowing. 


Credit scores are still pretty new

To understand what’s going on, we need to acknowledge that the concept of a credit score is still relatively young in the grand scheme of things. The first credit score appeared on the market in 1989, about 30 years after credit cards became available to the masses. 

Credit scores have several hidden flaws, and modern technology does not address these issues.

  1. The type of score you can access yourself is rarely the same as what your lender sees. 
  2. Your score can vary depending on which credit bureau the app or bank option is viewing it through. 


If the number isn’t consistent, and you are unable to see what your lender or other stakeholders can, how is it helpful? 


Fair lending is just a start

A recent study released by DUCA Impact Lab & Angus Reid offered a list of criteria to help people recognize fair lending. One of the items on the list is in direct conflict with how credit scores work today:

The assessment of risk is objective, transparent and not prejudicial.

How can this be true if the borrower is unable to see what the lender can see when making a decision? What we have now is perceived transparency. The current state of credit scores has allowed us to make the assessment of risk easier for the lender. Unfortunately, it leaves the most vulnerable behind. 


The study also found that borrowers and lenders don’t trust each other.  Lenders believe that borrowers are not knowledgeable about financial products. In turn, borrowers say they don’t seek or even trust professional advice about debt because they feel pressured to “do things [they] don’t want to do.” Borrowers also worry they may be judged when sharing financial issues and personal information. It’s no wonder when one of the main underwriting criteria is shrouded in secrecy. People want to understand the consequences of sharing their financial information, and more specifically, what they need to do to improve if they don’t qualify. 


The issue isn’t only about the process of lending and risk assessment. We need to find ways to include programmatic safety features that protect the borrowers and not just the lenders. Think about the safety features of a modern car; financial products need to come with lane departure alerts and an airbag or two. 


Better lending for everyone 

With the right safety features and a truly transparent risk assessment process, better lending shouldn’t just be inclusive. Instead, it should increase financial capability for all those who come in contact with it. Smart institutions will find ways to be innovative by partnering with those who can move and experiment much faster than they can. We need a lot more than digital lipstick on old systems that don’t serve us all equally. 


References

DUCA Impact Lab, & Angus Reid. (2019, November). State of Fair Banking in Canada Borrower and Lender Perspectives.

Encyclopedia Britannica (1998, July). Credit card. https://www.britannica.com/topic/credit-card 

Skowronski, J. (2018, November) When did credit scores start? https://www.credit.com/blog/2018/11/when-did-credit-scores-start-152354/

Skeen, J. ( 2017, October). Percentage of Americans with Credit Cards. https://budgeting.thenest.com/percentage-americans-credit-cards-30856.html

Mussio, L.B. (2016, December). BMO brings Mastercard to Canada. https://history.bmo.com/bmo-brings-mastercard-canada/

CBC Marketplace. (2019, October). Equifax, TransUnion, Credit Karma, Borrowell: Should you trust your credit score? https://youtu.be/5BsxZFrV4dU