Monzo's Approach To Credit Scoring


(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 @anon44204028 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.


What If Scenario Calculator
Your say :speech_balloon: : Suggestions for UK Government to Improve/Aid the FinTech sector
#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.


Your say :speech_balloon: : Suggestions for UK Government to Improve/Aid the FinTech sector
(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.


#23

same here. They have an error somewhere in my file. When I give correct information it will not verify me so I have to guess what is wrong and give that incorrect information to verify myself :angry:


(benjaminlbowles) #24

A simple our lowest accepted score for this product is near 650, you’re currently ranging between 400-500, here’s a few tips to improve, and here’s our slightly reduced offer of credit - would be a significant improvement over the incumbents right now.


#25

One of the main confusions that Paul Rippon tried to clarify above is the different meanings of ‘credit score’. The credit score you can buy from a credit reference agency(CRA) is just a general credit diagnostic score to give you an idea of your credit health and nothing like what the lenders use to decide whether to lend to you. You could have a perfect experian score and be rejected for every credit card and loan and mortgage.

When the lender interacts with the CRA- instead of asking them what your score is and offering you credit if it’s over a certain number, they instead grab all the information from the report and run it against their own bespoke criteria which will be very different from what experian used to generate credit scores for their customers.

An example of how CRA score have little to do with getting credit… you may have low borrowing to available credit, never made a late payment, lived at the same address since you were born - which would all give you a very high experian rating, but when the lender runs the information against their criteria they may find your income (which experian has no idea of) is not high enough to borrow that much, or they may have it set up to reject anyone who pays their cards off every month so theyre not going to get any interest. It may even be a case that you’re a good credit profile for them but their lending budget has already been reached for the period so they can’t afford to lend to you at this time (e.g. during credit crunch).

Come to think of it there are a whole bunch of reasons why lenders wouldn’t want you to know why you’re rejected :scream:


(Tommy Long) #26

I know this is exactly what you’ve just said above but I think it’s a very important point so I’m going to repeat it:

There is no such thing as a credit score, every credit provider gets your report from Experian/Equifax and then has to apply their own criteria to decide eligibility

This means that it can be simultaneously the case that Monzo don’t re-engineer the credit score concept whilst being more intelligent than other providers in how they judge risk and apply the rules.


(venkat srinivasan) #27

Hi Folks :slight_smile:

I joined Monzo last month as the Head of lending . Look forward to interacting with the community !!

The CRAs ( Credit Bureau like Experian or Callcredit ) collect data and maintain individual credit information. This will include lot of lending related information like number of credit products a customer has , customer’s credit card balances , missed payments etc. The CRA often have bespoke credit-scores which gives an estimate customer’s ‘willingness to repay’ a loan.

Once we offer current accounts, we will be able to customise lending rules and develop internal scores for our customers specifically, using advanced data learning techniques combined with information on the individual’s spending behaviour, incomings and outgoings.

The idea is that we will then combine this insight with Credit bureau information to enhance our understanding of current account behaviours and help us to answer three additional questions before lending to a customer

  • Capacity to pay - Can the customer afford to pay the money back?
  • Sustainable lending - Can the customer pay the money back over the period of the lending agreement ?
  • ‘Fair’ Lending - Is this the ‘right’ product for the customer?

It’s not be something we will be able to do overnight but we’re committed to demystifying the lending process for our customers and this will affect our overall approach to lending.


(benjaminlbowles) #28

I think this basically proves the credit score products that CreditExpert et al are offering, are basically a con - especially at £20 a month to just view the information being held about you.

I think what would be great, and as I suggested earlier, is if some context was provided to the reason why people are declined credit - most banks and lending institutions hide behind lots of obscure reasons, so that they don’t have to tell you specifically why you got rejected for credit, and then specifically what you can do to improve/change the situation.


#29

indeed, and they also send you on a wild goose chase. Not enough accounts - you open one or two, then you get a neg for having searches and a new account, too many accounts, you close one, that’ll be a neg etc etc. The reality is most lenders want to see steady sensible behavior, that £20 would be much better spent on paying down debts, or spending on a credit card to show activity


#30

Oh and the number must change every month or 2, nobody wants to pay £20 to see a static score, so everything will change score, whether a lender would care or not :slight_smile:


(Sacha) #31

There’s no real need to pay to check your credit score in this day and age.

Clearscore, Noddle and Experian all give you your credit score for free (they hope to make money by recommending loans/credit cards that you are likely to be successful applying for based on your score). Clearscore will also tell you the positive and negative factors influencing your score.


(Oliver Ford) #32

Do you see how they might not be that well motivated to be particularly honest with you? :wink:


#33

And that they also have motivation for making insignificant events seem more significant. You spent a lot at Christmas, oh score is down, better get another card to lower interest or utilisation, oblivious to fact it’s all paid off already :slight_smile:


(Sacha) #34

There’s no incentive to recommend products you wouldn’t receive as they won’t receive any commission if they weren’t approved and would frustrate their users.