The credit scoring system that was started in the 1950s evolved into the Fair, Isaac and Company (FICO) score, which has helped lenders all around the world predict the behaviour of their clients regarding whether or not they will pay their bills on time and if they can handle credit in a sensible manner. However, regulatory pressure to make decision-making criteria more transparent – as well as the variety of new data points from the growing digitisation of financial services – has led to a gradual increase in the use of alternative data sources to make more fair, just, and accurate credit decisions.

Timeline

Listed below are the major milestones in the journey of the alternative credit scoring theme, as identified by GlobalData.

1841 – Lewis Tappan founded Mercantile Agency, the first credit rating agency in the US (later Dun & Bradstreet).

1849 – Henry Poor became editor of American Railroad Journal, which reported financial data (later Standard & Poor’s).

1899 – Retail Credit Company (RCC) was founded, collecting personal information on millions of borrowers.

1956 – Engineer Bill Fair began work on a standardised, impartial credit scoring system that formed the basis of FICO.

1968 – TransUnion was founded as a railroad leasing organisation.

1970 – Fair Credit Reporting Act (FCRA) was enacted to promote accuracy, fairness, and privacy of data collection.

1974 – Equal Credit Opportunity Act (ECOA) made it illegal to discriminate on the grounds of sex or marital status.

1975 – RCC changed its name to Equifax and continued along the path of computerising records after Foreign Contribution Regulation Act (FCRA) criticism.

1989 – Bill Fair and Earl Isaac unveiled the first consumer credit score, known as FICO.

1993 – Alternative credit scoring start-up Cortera launched.

1996 – Experian was founded – the newest of the most established credit bureaus.

2000 – L2C, specialising in alternative credit scoring and analytics, launched in the US.

2003 – Fair and Accurate Credit Transactions Act of 2003.

2004 – FICO Expansion launched, which analyses debit data, membership data, utility data, and third-party scores.

2005 – First P2P online loan underwritten in the UK.

2006 – Internal-ratings based approach to credit risk introduced by Basel II PayPal bought BillMeLater and rebranded it as PayPal Credit.

2008 – Global financial crisis drove retrenchment of incumbent banks from small business and sub-prime lending SEC started requiring marketplace lenders to register products as securities.

2012 – ID Finance, specialising in data science-led credit scoring, launched in Barcelona Alternative credit scoring start-up CreditVidya launched in India, boasting 10,000+ data points.

2014 – Alternative credit scoring start-up Destacame launched in Chile.

2015 – Alternative lender Zest Finance raised £150m ($207.52m) in funding from Fortress.

2016 – International Finance Corporation invested $12m in underbanked lender Kreditch.

2017 – Deserve launched in the UK, offering credit cards based on alternative credit scoring data.

– Alternative credit scoring start-up Aire raised $5m in series A funding.

2018 – Berlin-based credit scoring start-up Bonify provided 600,000 free credit reports.

– B2B credit scoring firm Cortera secured $10m in funding.

2019 – Amazon partnered with Synchrony Bank to launch a credit builder credit card.

2020 – Credit Kudos, Fronted, 11:FS, Coconut, Capital on Tap, Mazuma, SeedLegals, and         TrueLayer launched Covid Credit.

– ODX, a subsidiary of OnDeck, developed a solution specially configured to the CARES Act

– UK-based Wiserfunding launched Artificial Intelligence (AI)-enhanced cloud-based credit risk assessment tools in India.

This is an edited extract from the Alternative Credit Scoring – Thematic Research report produced by GlobalData Thematic Research.