Have credit scores overstayed their welcome?

Let's dive a little deeper.

A lot rides on how credit bureaus portray someone as. The potential to fund the dream house, a car, or education abroad. Even the destination wedding that everyone had been gaga-ing over (in the good ol’ pre-pandemic times). In not-so-fun terms, the credit bureaus have a massive potential to influence someone’s access to credit when it’s needed to run a business, pay salaries or stay afloat when the times aren’t ideal.

For Indians, only 3% of whom have formal credit histories, it’s an uphill climb to secure credit through conventional means (i.e., the big lenders, working with documentation, and deciding loan approvals).

In another twist, it’s a travesty of fate for Indian women, who often get lower amounts lent out to them at a higher interest rate. And it only gets murkier because these scores play proxy comfort zones for lenders who try to offset risks by offering money to someone they can ‘trust’.

That’s an interesting word there – trust, and how it translates into a score based on how frequently someone pays their bills on time (sometimes, how many days in advance).

For a neighbourhood grocer going to the bank to get a loan sanctioned for his business, it’s a rigamarole of branch visits, physical paperwork, and ultimately, a better-luck-next-time ending.

For banks, a good score doesn’t necessarily mean the person is up for a loan. That leads to spamming the pre-qualified good borrowers and then being blocked because they DON’T want to be heckled for not needing a loan.

The fix, you ask? Let’s just do away with the credit scores! Maybe in a world where the sun shines as it should and ice caps don’t melt as quickly. But we’re not there yet.

That’s why a slew of innovative firms including fintechs and intelligence companies have come up with a credit-beyond-credit-scores model. They mean business – by all means (there are no free dinners, really).

It’s a world where people trade data for credit, and technology ensures that the funnel gets filtered with the right candidates who are trustworthy in a more inclusive sense. There’s alternate data at play – like spending behaviour and cash flows. The models built on artificial intelligence and machine learning assess a person’s credit discipline to see if someone applying for a new loan has played rogue with previous repayments, or if so, for what reason.

There’s AI here to weed out biases, and there’s big data analysis to ensure nothing worth noting skips scrutiny. All of this also helps lenders identify borrowers based on their need and a real ability to repay the loans and not just historical data. This allows lenders to offer targeted and personalized credit products. At interest rates that are specific to each loan applicant – across an extensive borrower base. Alternate credit scores help people – who didn’t generally make the cut - score a credit product.


Lending is risky. Technology can offset it
Ensuring on-time repayment begins even before the loan is disbursed. It's all about precision-based credit assessment, made possible with AI-powered predictive models. Here's how you can get them right.

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Embedded Lending 101 
Disbursing small-ticket digital loans is expensive for legacy banks, which keeps them from catering to small businesses. Embedded lending eliminates overheads, and makes the lending process shorter, cheaper, and faster.

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Bridging the India-Bharat credit gap 
Finance is a service, and more so, a right. Technological innovation must work to bring customized financial products to even the most underserved segments of the Indian economy.

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Context-first Embedded Finance with AI 
Lenders need to look beyond 'who gets the loan' to 'when, where, and how. AI can help bolster prediction engines and enable in-context loans that also lead to higher conversion rates.

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Creditworthiness beyond credit bureaus 
While the lending ultimately happens through a bank, an NBFC, or a micro-finance institution, technology companies like Paytm and Amazon, facilitate the data analysis part and pass on the information of creditworthiness to lenders.

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A shot in the arm for thin-file borrowers 
Efforts are underway to serve a wide range of customers, from young consumers and immigrants to retirees whose records may have stagnated, to those recovering from past mistakes or misfortunes. 

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Download our E-book for a crash course on Embedded Finance and how your business can leverage it to improve user experience, drive repeat orders, and boost Average Order Value.

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