Lending as a dynamic industry has been subjected to numerous upgrades in terms of methodology. One needs to stay updated with the latest technology trends in order to stay relevant. Traditionally, lending companies have been evaluating their customers on the basis of credit scores received by third-party companies. These companies analyze a person’s payment history; current loan amount amongst a few factors to calculate the number. For instance, credit scores calculated by FICO, a financial-services research company, are used by more than 90% of the banks and money lending businesses.
Several modes of finance and digital lending platforms have been developed to transform the older business models. Today credit scores are not just used by banks or lending agencies to grade credit-worthy individuals. Increasingly, online lending firms, insurance agencies, and even employers are using credit scores as a proxy to assess how credible customers are. Therefore, the time has come for the lending enterprises to re-evaluate their credit scoring process to meet the changing industry requirements.
Why do lenders need to overlook the conventional credit scoring process for better evaluation?
There are numerous problems with the current credit scoring model which generated the need for changes or a complete overhaul. Some of them are mentioned below:
- Credit reports provided by firms may have incorrect information or missing data that can hugely impact individuals credit score. This could happen due to a large amount of information being shared. It required additional manpower and efforts to spot errors and taking appropriate steps to ensure the credit score is correct.
- The credit scoring model of third-party firms is more or less generalized which may or may not be suitable for all lending firms. With alternative finance like P2P lending, invoice trading, crowdfunding gaining traction, there is a need to diversify the credit scoring process for better evaluation.
- One of the major flaws of the conventional model is the fact that businesses have little or no idea about the factors being incorporated while calculating the creditworthiness.
- Changing or modifying the parameters or creating own sets of rules is questionable. Currently, everything is preset, and you have to depend on the judgment of these credit scoring firms completely.
- The conventional credit scoring process has less forecasting power and doesn’t meet the fast-changing pace of the lending market.
Banks and lenders need to have a complete picture of the customers and not rely on the data provided by external firms. Refining the credit scoring process will give lenders the confidence of taking a more controlled risk and have a better understanding of the customer’s credit-worthiness.
What do you need for better credit risk analysis?
What today’s forward-thinking lending firms need is a platform that is automated and customizable to offer better credit evaluation. The platform should have the flexibility to allow lending businesses to manage customer data based on the business requirements. The chosen solution can also provide a more reliable and personalized experience and ensure modifications as per the dynamic market environment.
Akeo Lending offers solutions that allow you to adapt to the changing lending market and consumer expectation swiftly. The platform offers customized credit scoring process to analyze the customers’ credit-worthiness. Businesses or Lending enterprise just need to apply the formulae once on the platform to make the credit scoring automated.
Read about Rule-Based Credit Scoring here.
Lenders require a complete and accurate image of customers to reduce the risk intensity. They need to update their credit scoring process based on their business model and not rely solely on the third-party platforms. Constant improvements and innovation are the keys to stay relevant in such a dynamic market.