TransUnion and Spring Labs are collaborating to let consumers share their credit score information with decentralized finance lenders.
The intent is to let consumers leverage their credit reputations to get better terms from decentralized finance (DeFi) lenders than they typically do today. Many crypto lenders do what's called "over-collateralized lending," where in order to borrow $1 worth of digital currency, a user has to post and maintain $1.25 worth of collateral. If consumers can prove they are creditworthy, the reasoning goes, they can borrow much more affordably.
The new credit data offering, which is delivered through a Spring Labs spinoff called Quadrata, will let decentralized applications use the compliance mechanisms traditional financial applications have to use, according to Matt Smith, chief technology officer at Spring Labs. It will let them add identity verification, anti-money laundering checks and know-your-customer checks, "making all of that verifiable so you can satisfy your compliance requirements as a regulated company and still interact with this new model," he said in an interview.
"That's where we're seeing across the blockchain space a lot of growth happening because it's been a wild west for a long time, but there's really a limit to how much capital can get injected into that sort of loosey-goosey ecosystem," Smith said.
Spring Labs handles identity verification and pulls the credit score information from TransUnion. Spring Labs also provides an attestation, basically a signature asserting that it has reviewed this user's score and it fell within the range that the DeFi application has specified. The DeFi lender gets the information "off chain," not recorded on a blockchain.
This service will be used only at customers' request, pointed out Liz Pagel, senior vice president of consumer lending at TransUnion, which is based in Chicago.
"If I have a [cryptocurrency] wallet, I have to request to put my score on the wallet," Pagel said in an interview. "I know it will benefit me because I can work with more institutions via my wallet. If I verified the AML [Anti-Money Laundering], KYC [Know Your Customer], all that is checked and I've got a stamp of approval and I've got a 780 credit score on there, that opens up the world to me. I choose to put my data there and then that data can be shared and it remains anonymous. So there's a 780 credit score, a verified fraud check, but you don't know it's Liz Pagel."
This form of sharing of credit information with DeFi entities is new in the U.S., according to Seoyoung Kim, associate professor of finance and business analytics at Santa Clara University's Leavey School of Business.
"But it's begun to be implemented in other countries, especially countries where lending activity is sparse because they don't have the financial infrastructure in place in terms of a solid record keeping system," Kim said in an interview. "If you think about areas where the record keeping system has not been as advanced or as trustworthy as developed wealthy nations, then you really do want to use some sort of public blockchain that people will have greater faith in."
Eventually, TransUnion and Spring Labs hope established financial institutions will use this service to underwrite other types of loans, like mortgages, on a blockchain.
For several years, Spring Labs in Marina Del Rey, California, has been developing technology for securing and tokenizing sensitive information, such as personally identifiable information. It has long had a vision of helping financial firms share identity verification, KYC and fraud information without sharing their customer lists.
Some fintechs already use Spring Labs' technology to verify income and employment and share fraud information. Another group of lenders that specialize in efficient energy projects like solar panel installation also use the technology.
"We've added a couple of new use cases for it, like helping organizations minimize how much personally identifiable information they have available in the raw in their databases," said Joel Eckhause, chief operating officer of Spring Labs, in an interview. That information is replaced with tokens using Spring Labs' technology.
