Monzo's Approach To Credit Scoring


(Ben Green) #1

I’m curious about what Monzo thinks of the current process of credit scoring, in terms of generating, updating and just simply reading them.

The three top providers - Experian, CallCredit, Equifax - all have much the same type of data collected, but each scored in different ways.

This becomes problematic when, for instance, someone may have an average score with Equifax and CallCredit, but and an excellent score with Experian. They may look at their excellent Experian score, apply for a mortgage that they know they can afford, but the mortgage provider might search against CallCredit or Equifax leading them to be declined and negatively affecting their score further.

This also creates confusion as to how to improve ones score, referenced in this extract from MoneyWise in December 2015 -

This lack of universal standards can also lead to credit rating agencies giving mixed messages on the best way to improve your score.

For example, getting rid of credit cards you don’t use any more is a good idea to improve your score, says Lisa Hardstaff, credit information expert at Equifax: “If you’ve already got £40,000 credit, lenders might ask why you want another £10,000.”

Experian’s James Jones agrees, but adds that using too much of the credit available to you can also be damaging: “In our experience, it’s a good thing to have low utilitisation [using a small amount of your available credit]. The fact you’re not reliant on it shows you are creditworthy.”

Some experts also believe that the way information is collected is in need of modernisation. One idea is to utilise the data of your social network. If they began enforcing that then I would have no choice but to begin unfriending certain people (online, but not in public) and others may unfriend me too.
The article continues…

In August, Facebook secured a patent that gives someone a credit score based on the scores of their contacts. In the words of the patent application: “When an individual applies for a loan, the lender examines the credit ratings of members of the individual’s social network who are connected to the individual through authorised nodes. If the average credit rating of these members is at least a minimum credit score, the lender continues to process the loan application. Otherwise, the loan application is rejected.”

The idea that your credit score could be affected by your friends’ behaviour is scary stuff, although there’s no suggestion that this technology is in use yet. But several companies are using social media and other digital information to process credit applications in different ways, and they’re all very secretive about the process.

Pariti have already recognised that there is a problem and things need to change and are therefore intending to develop their own credit scoring system,
http://community.pariti.com/t/credit-score-noddle-integration/325/3?u=beningreenjam
… so they’ll be a fourth contender! Old quote from I don’t know who -

There are 3 different competing “standards”, we need to agree on a single one. Here’s what we propose… 1 year later… There are 4 different competing “standards”.

What I think the country needs is a single agreed standard of assessment, and actually enforce it, without complication for the customer, or at the very least, one place to view all credit reports at one unified cost.

Will Monzo produce its own credit scoring system, or will it partner with one or more of the already existing providers, or will simply avoid credit scoring all together?


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(Ben Green) #2

Just given this a little more thought.

Would it be feasible and popular if an open source system were created? Obviously participating developers would have any code reviewed by peers. Not just for the sake of quality but also for prevention of data security breaches. This would more likely satisfy the current credit score providers if it’s one they can all contribute to.

Would still need to think of way to get a regulatory body involved in order to enforce the use of a single system.


#3

Credit Reference Agencies will oppose as as soon as there is a standard credit score why would their be a need for more than one CRA?


(Ben Green) #4

Exactly, we only really need one. It’s all the same data after all.

I realise I’m in danger of sounding like a communist :grimacing:, but you have to admit, the current variety of systems has no benefit to anyone as the scores that they produce can and easily do differ so drastically.


#5

Nothing wrong with being a Communist, they would have thrived had not the Yanks fought a cold war against them with trade and technology embargos.


(james_e_bell) #6

This is an interesting area because it also comes down to the risk/fraud rules at the credit provider - I think what actually happens when you look out there is there are many many many different systems considering your financial risk (using the credit agencies ratings as inputs)


(Ben Green) #7

I think, IF Monzo were to ever create their own credit scoring process then they would need to apply for a license to offer financial advice.

If it displays a poor score - in order to meet user needs, match expectations of what they’re used to, plus I’m used it’s required by law or regulatory body somewhere - then it should suggest ways in which it can be improved, which is where it starts encroaching into the realms of financial advice.


(Sacha) #8

Aren’t the credit scores merely a guidance to the lenders? It is well known that banks will often have far greater detail on their customers to the point where many customers will have preapproved offers waiting for them when they login. If Monzo was going to help customers with low balances it would be doing the same (at least in the background).

Monzo could certainly help customers with poor credit scores by giving reasons why they aren’t able to offer an overdraft to them. Currently I can login to something like Clearscore and get a list of reasons behind my credit score. If a free website can do that, it seems odd that a financial institution the customer already has a relationship with wouldn’t.


(Ben Green) #9

Yes, that’s true, but unfortunately it doesn’t help when dealing with other financial institutions and as Monzo has specifically said they currently don’t see themselves ever offering loans, credit cards or mortgages in-house, but do want to be the hub of our financial lives, I’d appreciate a single place where I view all available credit scores and how to improve them.

I’d certainly support this kind of clarity. Monzo are already open with us as much as possible so I don’t see this being an issue.


#10

A Consumer Credit License to cover the fact you advising customers plus the relevant categories on your Data Protection registration…assuming Monzo not already covered by these


(Ben Green) #11

Thanks @MIROW, I’m not quite so clued up on the names or some cases even the existence of such license or regulations.


#12

It is amazing how many categories for data protection registrations so normally you tend to apply under additional codes as a catch all just to be sure :slight_smile:


(paul) #13

Thanks @beningreenjam for kicking this topic off! I’ve read every post and contribution, and it’s all really interesting stuff! My blog post on our approach to overdrafts :money_with_wings: is quite relevant and you might like to have a :eyes: if you haven’t already.

I’ve spent much of the last 20 years or so working in various :bank:s and lending/borrowing (depending on your perspective) fascinates me. In my blog I raised a topic that I wanted some feedback on “How we work out what is the ‘right’ amount we are able to lend you” and our approach to credit scoring is absolutely part of that.

First up the term ‘credit scoring’ has many meanings. It can mean:

  • a consolidated credit score produced by one of the 3 bureaus (Experian, Call Credit and Equifax) as you mentioned,
  • new scores and methods like Noddle
  • A process used by a :bank: or other provider of credit to determine if and how much to lend

Just picking up on the final example. Depending on the sophistication of the lender the ‘process’ might incorporate one or more of the following (non-exhaustive elements):

  1. Information provided by a customer ‘applicant data’
  2. Information already known about the customer (e.g. spending and saving patterns) @sacha covered this
  3. A consolidated bureau score (see above)
  4. ‘raw’ bureau data i.e. comprehensive details about lines of credit, missed payments, credit applications made, summary current account data, rental information…
  5. bureau proxies e.g. affordability and indebtedness measures
  6. A ‘scorecard’ this is basically an exercise in regression techniques to establish which pieces of data (variables) about a customer are the greatest predictors of certain behaviour e.g. repaying borrowing
  7. Policy rules (alluded to by @JamesBell). These are applied to the various pieces of data to limit/control risk. Some examples might include ‘no lending if any credit commitments have been missed in the last 6 months’ or ‘maximum loan of 10x net income’ or ‘lend 20% more if home owner’

So what is the :monzo: position on all of this and what will we be doing with our overdrafts?! Well my posting for now is quite long enough so I’ll see what, if any, reaction there is to what I’ve already said and then I’ll share some more :wink:


Full bank credit reporting (not scoring)
(Alex Sherwood) #14

So I’m guessing you’ll be incorporating option 3

into your analysis…I suppose the approach that Monzo takes is partly down to your & the investor’s risk appetite & I have almost no real knowledge of what works best so I won’t try to guess what you’ll go for :slight_smile:

But Monzo’s approach is the piece that I’m dying to hear about!


(Ben Green) #15

As @alexs as suggested, option 3 looks like the better option to me too as it doesn’t add another scoring system to the already confusing mix. Unless Monzo and/or the community feel it would be in our interest and take the Apple approach of using some courage to develop a new and better system.

Whichever way forward, I think as close to 100% clarity for the sake of the account holder is necessary, something I’m confident Monzo would provide anyway but no so much with regards to other lenders.

I’ve been given this more thought recently. As @MIROW has stated that there’d be an uproar from the already existing credit reference providers if all lenders were forced to use a single system as what’s the need for more than one provider?

One possible compromise may be too petition to the government that all lenders must clearly state which provider (if any) that they use as well as clearly outline their lending decision policy, as mentioned by @JamesBell and @paul’s covered in his post in point 7. Even better if they can incorporate our own personal score into their website/app before submitting the application. Having this knowledge available prior to an application would drastically reduce the amount of misjudged applications across the country and therefore would significantly increase overall quality of our scores.

Yeah the stubborn and archaic lenders would boo and hiss that they have to make changes but at least they can stay in business :laughing:

Same here! :wink:

In response to Richard’s later post, I’ve edited this to better explain my suggestion to avoid further confusion.


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#17

That would be a bad thing. A stream of applications in rapid succession is an indication of applicants getting in to financial difficulties.


(Ben Green) #18

Another thing that does bother me about the current state of credit monitoring, is that it takes between one and two months to update a report.

I assume it must be done manually, at least in part. If true, then its not only slow (and we’re unable to see if there has been any fraudulent searches using our information) it also means that our entire financial information of pretty much every adult in the country is readable by a group, or groups, of people. How much do we trust them? Although I hope I’m wrong about this.


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(benjaminlbowles) #19

So I’m currently in the process of buying a house and have been very cautious in the last 6-12 months to avoid opening new accounts for credit with lenders and current accounts.

When Monzo transitions to a full current account, will this appear as a new account straight away, as bizarrely opening a new account (even without credit) reduces your credit score…

Anybody from Monzo that could shed some light?


Full bank credit reporting (not scoring)
#20

There’s so much misinformation and misunderstanding when it comes to credit checks and normally i am quite informative on forums like MSE, but monzo community is pretty high brow and i see the great Paul Rippon seems to have squashed all the usual misunderstandings in one post! :clap:

As an investor I don’t think monzo should be too focussed on reimagining credit scoring when their plan is just to be the best tech hub and outsource balance sheet risk.

What they could do is provide a much better rejection experience for users. I’ve been rejected many a time and the experience is on a sliding scale of awful with lenders just washing their hands of you, from “sorry an error has ocurred, go back to the start” (repeat and then give up), to “unfortunately you’ve not passed the credit checks… go check your credit report at experian/equifax, (click here to go away)”, to “unfortunately you don’t qualify for this offer, but see below for sub prime partner offers (which you probably wont qualify for either despite the bar graph saying 90% chance of acceptance-but they will pay us when you apply to them)”. They basically want you to get off their website if their risk models think you’re not going to be profitable.

This is something monzo could improve on because the goal seems to be customer experience first and profit second so if a customer seems to be of little worth they could still be nice about it and offer them a hand. You could tell users why they’ve been rejected. I’m not an expert but i don’t see why the rejection response couldn’t be “History of defaulted accounts” “High debt to income ratio”, or “Lack of address stability”. You could then explain how this could be improved.

Even fintech lenders like Zopa / Ratesetter have ‘get lost’ responses to rejectees. It would be fitting with the Monzo ethos to help users on their path to improvement rather than telling them to get lost.

If someone applied for a £1000 overdraft but didn’t pass the checks, instead of “Sorry, go ask experian” you could be very helpful e.g. “our credit check has indicated you have very little credit history, we’d be willing to offer you a £50 overdraft to help you grow a credit history (click to accept or reject)”


(Alex Sherwood) #22

I completely agree with your suggestions regarding Monzo providing a better rejection & feedback experience for users who don’t have the necessary credit score to receive credit.

But when it comes to this point

I disagree - overdrafts will be Monzo’s first product & the product that enables them to break even so it’s a pretty big deal for the business & they should develop this product to make it as good as possible.


TL;DR I believe Monzo could do a better job at both assessing creditworthiness & informing users about their score / dealing with issues, than the incumbents.


They’ve already proved that by applying machine learning (& rules) to their fraud prediction model, they can beat the industry average so why shouldn’t they be able to do the same when it comes to assessing creditworthiness? That would enable them to lend to more users & earn more revenue as a result.

Also, we’ve all heard the horror stories about the difficulties users have when trying to get their credit report amended, after taking a hit for something happening that shouldn’t have actually impacted their credit score. I’d argue that Experian & Equifax are essentially a duopoly and don’t care about individual users enough to bother with resolving those sorts of issues.

On top of that, I’m unable to access my credit score through Experian’s site because of their archaic, inflexible verification process and I’m sure I’m not the only one…

Lastly, I could be wrong but I have a feeling that it would be difficult for Monzo to identify exactly what caused the user’s score to be too low, based on Experian’s data. As I don’t think Experian shares the exact formula which determines how scores are calculated. Monzo could be much more transparent (as they are in every other area of their business) & would know exactly what the negative factors were.