New Underbanked FICO Score Faces Old Banker Skepticism

If the new FICO score is to succeed, it's going to have to impress the Al Engels of the world.

Engel, the chief retail lending officer at the $19 billion-asset Valley National Bancorp in Wayne, N.J., is not opposed to the plethora of new credit scores, but he and other bankers need to be convinced that they, er, need them.

"We look at everything that comes down the road, but I have not personally seen something that I feel is superior to what FICO has already created and supported through the years," said Engel, who has spent 17 years at Valley and worked for other banks.

And that is just one of the hurdles facing FICO (formerly Fair Isaac & Co.) and its partners, Equifax and LexisNexis Risk Solutions, which this week revealed they are working on the new score. It is meant to help lenders vet applicants for credit cards who do not qualify for a traditional credit score. The companies have lots of competition, including startups such as VantageScore Solutions and RevolutionCredit, and it might be harder for bankers to afford these fees during a period of higher regulatory costs and limited revenue growth.

The developers were ready with a comeback, touting the new score's multiple features. One is that it allows banks to automate much of the credit decision-making process, which should save time and money, said Ankush Tewari,senior director of market planning at LexisNexis Risk Solutions.

"This is going to save issuers manual processing time, and it can make life easier for consumers" by lowering demands for documentation, Tewari said.

Inside the New Score

Data providers are clearly drawn to the market because of its size. There are 50 million "unscoreable" people in the U.S. (25% of the U.S. population) who cannot get a credit card because they have little or no credit history. Some are undocumented, some are young, some simply have borrowed little and therefore have minimal credit histories.

Instead of being based on credit history, delinquent or defaulted loans, the new FICO score will be based on telephone and utility bill payments and property records. It will give high marks to people who have faithfully paid their phone, oil and gas bills and who have not moved around too much.

Twelve large credit card issuers have been piloting the new score; FICO and its partners did not name them. Several major issuers were contacted for this story, and none had any official comment. The new score is slated to launch industrywide by the end of this year.

Equifax provides telephone company and utility payment records for 186 million U.S. consumers, which it receives monthly from a consortium of providers. LexisNexis provides property records — showing where people have lived, how long and how much their property is worth — from what it says are thousands of data sources.

FICO's contribution is its scoring engine, which is already used by 90% of U.S. banks in consumer credit decisions.

"We wanted to make sure we're looking at data sources that have positive reporting, which means they're reporting good payment behavior as well as negative reporting of delinquencies or defaults," said Dave Shellenberger, senior director of scoring and predictive analytics at FICO. "Because we're an analytic company, it's critical that the data is predictive of future payments."

FICO built several different test models using the new data and found that more than a third of previously unscoreable consumers got above 620 on the new score, representing an acceptable level of credit risk, Shellenberger said.

For banks, the new FICO score will work just like existing ones. When a bank's underwriting system pings FICO for a credit card applicant's score and gets no response, the bank will have the option of requesting the new score, which can be used in automated credit decisions like any other FICO score. It will be delivered through Equifax, so any lender that can access Equifax credit data will be able to use it.

"The score is designed to work with existing FICO scores; we dealt with the operational execution challenge up front," said Jim Wehmann, executive vice president of scores at FICO. "It will not require lenders to rip and replace their existing scores, which should cut the time to market and implementation."

Heavy Competition

Yet the pursuit of alternative credit data has been going on for awhile.

Banks have contemplated the use of alternative data sources for credit decisions for years. And several tech startups have come up with their own innovative products that they are trying to grow.

VantageScore — a joint venture of credit bureaus Experian, Equifax and TransUnion — is one of several technology startups that make use of so-called alternative data to evaluate consumers who cannot be scored using traditional criteria like timely credit card payments.

Other companies are taking very different approaches to the challenges of making credit available to more people.

For instance, RevolutionCredit offers an alternative based on financial education. Consumers who sign up for the service — usually at the recommendation of their banks — are put through a series of online courses and tests on financial topics, the idea being that they will be more creditworthy once they complete the series.

So why did FICO enter the race now?

More data is available than in the past, officials said. And bank customers were looking for an industry standard score with "the credibility, national scope, and reliability of a FICO score," Wehmann said.

"We recognize that we can't generate a reliable score on traditional credit bureau file data alone," he said. "So we wanted to bring in new creditworthy individuals in a reliable and safe way for the consumer and the lender."

Customer Concerns

But questions about cost and demand will continue to percolate.

FICO, Equifax and LexisNexis are charging extra for the new product, but banks will only spend so much for credit scores and they might not see the need to shell out extra dollars.

"I was on the banking side for the first 10 years of my career, and we knew there was only a certain amount of our budget that we could put against credit scores," said Sarah Davies, senior vice president for analytics, product management and research at VantageScore.

Instead of charging extra, FICO, Equifax and LexisNexis could have integrated the data they are using for "unscoreable" consumers into their existing product, said Jennifer Tescher, chief executive of the Center for Financial Services Innovation. That is what VantageScore does, as well as the other credit bureaus, Experian and TransUnion, she said.

"Since they've structured this as an extra charge, that might be a turn-off to some banks," Tescher said.

And, again, there is the need to convince bankers that they must have such scores.

Valley National already has ways to evaluate the "unscoreable" consumers that FICO, Equifax and LexisNexis are targeting, Engel said.

"If they're unscoreable because they haven't used credit before, that doesn't block them from getting credit at Valley," he said.