FICO ramps up effort to build better credit scores with an experimental data lab for lenders

The use of alternative data to gauge individuals’ creditworthiness is expanding as many fintech companies and other lenders look for ways to broaden their pool of potential customers. But making lending decisions based on alternative data sources is not yet an exact science—which is why FICO has created a new digital testing ground to fine-tune tools that may help open up credit for hundreds of millions of potential borrowers.

The creator of the FICO Score, which is used by 90% of U.S.-based lending institutions to make lending decisions, launched its Inclusion Accelerator Program and Financial Inclusion Lab this week; both are a part of the company’s Global Financial Inclusion Initiative. FICO already has two scoring products that use broad-based alternative data: UltraFICO and FICO Score XD.

The goal of its new incubator program is to ultimately expand the use of alternative data for credit scoring among lenders, thereby tapping into underserved segments of the population, says Sally Taylor, vice president and general manager of B2B Scores at FICO.

Alternative data includes things like bank account balances and bill payment history. For those who do not have a traditional credit score, or who have a “thin” credit file, using alternative data could help lenders determine whether to offer them loans. That may include immigrant populations, for example. 

A low-risk program for a risk-averse industry

The accelerator program and lab will serve as a proving ground that lenders can use to test out tools that could help them reach those population segments, without having to sink tons of resources into building and deploying them. Effectively, it creates a low-risk way for lending institutions to measure whether adopting an alternative data-driven scoring model is worth it.

“What these programs do is help lenders adopt alternative data solutions by creating an incubator—it includes tools, and ways of testing things before the lenders make the decision to make an investment,” says Taylor. “It’s part of creating an adoption cycle,” she says, and potentially, if more and more lenders start using alternative data to score credit applicants, there are more than one billion people around the world who could begin popping up on lenders’ radar.

Feedback from the program’s early adopters has been positive, Taylor says.

“The response has been great.” she says, adding that “for [lenders] to move on to adoption, they would’ve had to see some benefit or that they would be able to expand credit to more people, and to do so responsibly.”

So far, that appears to be happening. And it’s largely because FICO’s incubator is doing the heavy lifting and saving lenders big time in research and development costs.

“Normally, every lender would have to, through a lot of effort, implement it into their loan-origination system, but we’ve made it easy to test, to see what the take-up rates are, and see if they’re getting the results that they expect—all within a trial without doing the expensive heavy lift of integrating it into their traditional system,” Taylor says. “Then they get the results back, and then can make the decision about whether to invest and build out their own systems.”

While the use of alternative data to make lending decisions has some clear risks, it does appear to be a win-win for both consumers and the financial industry. Those who had been previously shut out by lenders, for one reason or another, could be able to borrow, and lenders can open up their products to an entire new swath of customers. And as a greater emphasis on financial inclusion permeates the air, FICO’s tools may help spur things along.

“We’re always looking for ways to expand credit access,” says Taylor. “And whether that’s new scores or things like this accelerator program or consumer-facing initiatives,” she says that FICO is making “a multipronged effort” to get it done.