As AI infiltrates credit scoring, TransUnion invests heavily in tech diversity

Traditional credit scoring is under siege from alternative underwriting, and TransUnion is joining the future by investing in other emerging trends such as mobile device security and health care payments.

The Chicago-based TransUnion has made two acquisitions in the past 48 business hours. On Friday, TransUnion agreed to acquire Portland, Ore.-based iovation, which provides device-based information. On Monday morning TransUnion made another deal to acquire Fort Worth, Tex.-based Healthcare Payment Specialists (HPS). In April, TransUnion announced a deal to buy CallCredit, a Leeds, U.K.-based consumer credit bureau, for $1.4 billion (financial terms of the other deals were not disclosed).

TransUnion, which did not return a request for comment by early Monday afternoon, is addressing a threat and an opportunity. Venture capital is pouring into fintech startups that use artificial intelligence as a predictive indicator — moving away from the traditional credit score, which offers little visibility into the creditworthiness of unbanked or thin-file consumers.

The traditional credit scoring industry has additionally suffered fallout from the massive 2017 Equifax breach, giving alternative underwriting options more fuel while nudging traditional credit scoring firms to diversify in a manner similar to traditional payment processors, most of which have acquired or collaborated with tech-savvy partners to find new uses for their considerable vault of transaction data.

New rivals include Petal, which uses cashflow underwriting as a substitute for credit scoring; and Square, which uses its merchants' transaction history to determine their ability to repay a cash advance. PayPal has a similar offering for its merchants; and Affirm has received more than $100 million in funding for its alternative credit model.

The iovation deal could provide huge benefits to TransUnion in that market. Iovation has actionable insight into into 5 billion unique devices from more than 35,000 brands in 50 countries. Once the deal closes, TransUnion will own a company that is positioning itself squarely in the Uber/Venmo market of "invisible payments" that rely almost entirely on mobile apps, with very little room for plastic cards.

Iovation can add security such as biometric authentication as an alternative to the traditional methods of authenticating and vetting clients. Iovation's suite includes a real-time reputation and verification feature to identify good consumers and prevent online fraud; a machine learning tool that predicts payment outcomes based on device trust, transaction, contextual or behavioral indicators; passwordless authentication based on device fingerprinting and a multifactor authentication tool that uses biometrics and proximity to secure access.

"The current market demands improved tools to identify applicants and customers, and many vendors are jumping into the space or expanding their current product offerings," said Shirley Inscoe, a senior analyst at Aite Group, adding one of the most popular approaches combines identifying a unique device and associating it with a specific digital person. "This is proving to be fairly reliable, and is a vast improvement over old methods such as knowledge-based authentication questions alone. Biometrics stored on the mobile device can also be utilized to authenticate the customer."

In an earlier article in PaymentsSource, iovation director of product marketing Michael Thelander, wrote that mobile devices can serve as both a "knowledge" (PIN) or "inherent" (biometric) factor, allowing mobile devices to serve as more one factor in identity security for cardless mobile payments and ATM access.

"This is a continuation of the attractiveness of security technology companies that include fraud detection and authentication services," said Raymond Pucci, associate director of research and consulting services at Mercator Advisory Group. "Larger payment industry firms need this expertise and their best option is to go out and buy it. Companies including Visa, Mastercard and Lexis-Nexis have made security-related acquisitions in the last year or so, and this will continue."

TransUnion's other deals address modern industry trends. By moving deeper into health care payments through the HPS deal, TransUnion can position itself to capture the "last mile" of health care payments by enabling migration away from paper-based payments with a focus on collections and Medicare transactions. HPS has more than 1,500 hospitals and other health care related clients. CallCredit provides more traditional credit bureau services, and is one the largest companies in that space in the U.K.