The difference between traditional and alternative credit scoring

Christian Widhalm, CEO of Bloom Credit, joins TheStreet to explain different types of credit scoring.

Transcript

00:00So there's a lot of discussion about credit scoring and credit data right now.

00:05Can you talk to me about the difference between traditional credit scoring and alternative

00:12credit scoring?

00:13Yeah, for sure.

00:14Look, and I think one thing that's important to understand, especially on the consumer

00:17side, is that credit is kind of like the chicken or the egg.

00:20If you don't have credit, it's tough to get credit.

00:23So I think before getting into the alternative side, it's important to understand what's

00:27going on with traditional credit reporting.

00:30The way that it's structured today is that you have three main credit bureaus in the

00:34United States, TransUnion, Equifax, and Experian, and they get all of their data on consumers

00:40from monthly reports that are sent from lenders that have repayment information on things

00:44like loans, credit cards, that ultimately make their way into the major credit bureaus.

00:50Now, traditionally, these have been limited to those types of products.

00:54The problem today is that credit data today is way more complex than it was 10 years ago.

01:01And at the same time, credit data today is less complex than it will be in the future.

01:07And that's because of a few different things.

01:10One is the introduction of new types of products and services that have been coming in, more

01:14novel financial products, things like BNPL.

01:17And ultimately, the way that consumers have changed their behavior around credit products

01:21has led to this sort of change.

01:24With FinTech, financial technology companies, they are working on the ability to take all

01:30of this new types of data in to help actually benefit the broader ecosystem, and specifically

01:34the consumers, for being able to access more affordable credit.

01:38And that's where the shift starts going from traditional scoring to now alternative scores

01:43that are going to include more types of data.

01:45And so if the data is, or the data are king, right, what kind of data should be included

01:52in this new alternative model?

01:55Yeah, sure.

01:56So there's a bunch of different types of data that ultimately can be included.

02:00A lot of it actually resides within the checking accounts of consumers.

02:05A lot of consumers, especially those that don't have access to a lot of credit, they're

02:09transacting through cash, through their checking accounts.

02:12And there's a lot of real golden information in there that can actually help them demonstrate

02:16credit worthiness.

02:17Things like monthly recurring obligations, such as rent, telco, right?

02:22Their cell phone bill, their utilities payments, water, gas, and electric that can go in.

02:26Among others, BNPL repayment, which isn't really taking full force yet, is also in the

02:32mix there, actually to help bolster the ability for consumers to demonstrate their credit

02:36worthiness in new ways.