New UltraFICO score stokes concerns about data privacy

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A new credit score that includes a consumer’s cash flow alongside their credit score — dubbed UltraFICO — is winning praise for its potential to help expand access to credit but also stoking concerns about its data privacy implications.

FICO announced this week that it is testing a new credit score with Experian and the data aggregator Finicity that draws on several months' worth of data from consumers’ bank accounts. The idea, according to FICO, is to create a “second chance” score that could allow consumers who’ve been denied credit due to the traditional model another shot at obtaining it.

But some observers saw an immediate potential problem — namely with credit bureaus getting unfettered access to bank account data.

“If the credit bureaus want to start routinely accessing our bank accounts, they should be subject to banklike regulation,” said Sheila Bair, a former chairman of the Federal Deposit Insurance Corp. “I’ve been a critic of big U.S. banks in certain areas, but I do believe their information security systems are substantially superior to the credit bureaus and that is due, in large part, to their regulated status.”

Bair sees a potential upside in that it could help expand credit access, but wonders if it’s worth the risk.

“The privacy and information security issues could easily outweigh those benefits,” she said.

Bair isn’t alone. Gary Reeder, vice president of innovation and policy at the CFSI, is concerned about risk on a systemic level around companies like credit bureaus that the entire financial services industry depends on so heavily.

“We’re getting to where we have larger sets of data housed in institutions that the entire financial services industry rests on, and they don’t have the same regulation and security protocols a regulated bank would have,” he said.

Though credit bureaus are overseen by the Consumer Financial Protection Bureau, the regulator focuses on consumer protection. It doesn't impose capital requirements to prepare for a possible data breach or failure.

“As you concentrate data and more people use that data to make decisions, there’s a liquidity and capital question that comes to the fore because people can say they have liability, but without capital that’s meaningless," Reeder said. "I can say you’re liable, but if your pockets are empty, there’s nobody to pay for that liability. The banks know that at the end of the day they are the only ones that have deep pockets, they’re required by law to have them.”

But Mike Pecan, head of data strategy at Experian, argues that the firms involved take security and data privacy seriously. He notes that the model is opt-in — consumers have to give permission for Experian to collect their bank account data. As a result, the credit bureau is unlikely to become an alluring honey pot of consumer bank account information.

Steve Smith, CEO of Finicity, said that his company has gone through extensive information security reviews to obtain data-sharing agreements with banks. It has also obtained third-party information security certifications for financial data, including PCI and SOC2. The company also uses the tokenized authentication methods in the FDX’s Durable Data API standard.

Reeder says he’s not opposed to the new score, but says there needs to be better safeguards.

“With the right controls and the right clarity for consumers about what they’re giving up, it could help people who are starting out their credit lives, particularly as they come to the U.S.,” he said. “There are large numbers of people who come who have good credit histories, but they can’t transport their score; their bank account data would probably be sufficient to tell you their creditworthiness.”

How the new score works

When a consumer applies for credit at a lender that supports the new score, they will be given the chance to opt in to the use of UltraFICO. The consumer will also be allowed to decide which of their accounts should be considered in the score.

Finicity, which has data-sharing agreements with several large banks but works with all 15,000 financial institutions, will then be given the go-ahead to draw several months’ worth of data from those accounts in whatever manner it normally would — through an API, screen scraping, or some other method.

Finicity will provide that cash flow data to credit bureau Experian, which will mix it in with its usual credit report data and pour it into the UltraFICO score model.

Banks will be able to slip the new score into their underwriting engines the same way they use other FICO scores like FICO 8 or 9.

According to FICO, some lenders plan to use UltraFICO as a “second chance” score.

“As opposed to a consumer being declined for the credit or terms they’re seeking, a lender has an opportunity to reach out to the consumer and say hey, if you’re willing to share additional information with me, I may be able to give you the credit you’re looking for,” said David Shellenberger, senior director of scoring and predictive analytics at FICO. “By leveraging checking, savings and money market accounts, information not found in a traditional credit file, we can show positive financial management experience and that correlates nicely with positive credit risk.”

The goal for UltraFICO is to promote financial inclusion, letting people who haven’t built up much in their credit report yet and people who have had temporary financial setbacks due to loss of a job or ill health, qualify for credit.

Online lenders have been considering bank account data in their underwriting decisions for years and have found it to be predictive of creditworthiness.

According to FICO, a handful of banks and credit unions are piloting the new score and many fintech lenders, banks and credit unions have expressed interest in it. The pilot should go live in the first quarter of 2019 and the score should be generally available to lenders next summer.

Who will benefit?

According to FICO, consumers who haven’t had a negative balance in a checking account for the past three months and have maintained a balance of $400 or more should see their credit score increase with UltraFICO.

“The greatest increase we see is for is for those consumers that are probably having the hardest time trying to establish credit,” Shellenberger said. “Those would be consumers with young or thin credit files and consumers who may have experienced previous financial distress.”

In FICO’s tests, 80% of consumers who have thin and young credit files but can maintain an average balance of $400 or more in their bank accounts see at least a 20% increase in their score.

“That can be significant for consumers that are trying to obtain credit at reasonable terms,” Shellenberger said.

Among consumers that have had financial distress, evidenced by a charged-off account or a collection account on file, one in ten see an increase of 20 points or more in the new score, the FICO tests found.

“There are 53 million unscorable consumers today — they cannot be scored by FICO 8 or 9,” said Pecan with Experian. “With inclusion of this consumer-permissioned data, we believe we could reach up to 90% of those people."

Pecan also said that older people who have paid off their mortgage, car loans and other debt and want to get a retirement RV often struggle to get credit.

“They manage their finances, but they haven’t used credit in a long time and can’t get a loan,” Pecan said. “This opens opportunities for them.”

But younger people, who haven’t had time to build up a strong credit file, may benefit most from the new score.

“This appears to be a shift to address how younger people use money,” said credit expert John Ulzheimer, who formerly worked at FICO and Equifax. Millennials and Gen Zers are less likely to use credit cards and loans than their parents were but do have bank accounts.

Ulzheimer also argued that only a narrow slice of consumers will benefit from the new score.

“This won’t turn someone with a traditional FICO score of 500 into an A+ credit prime,” he said. “This will push someone who is along the margins risk-wise over the finish line.” Such a person might be subject to high rates, he noted.

“Do you want to push someone over the finish line to get a credit card at 22% interest in their hands, is that really helpful for them?” he mused.

At the same time, Ulzheimer is favorably disposed toward the new score.

“It’s like combining peanut butter and chocolate,” he said of adding bank account data to credit report data. “It’s a darn good idea because it adds a whole lot of value to both of them.”

Will banks consider it?

One advantage banks may have from UltraFICO is a step toward better competing with online lenders.

“This seems to be a way to help slow-moving, dinosauric lenders be more nimble and compete with these cutting-edge online lenders that didn’t grow up married to FICO and therefore don’t have this dependence on FICO when they build their risk management platform,” Ulzheimer said.

UltraFICO lets banks modernize their underwriting decisions without having to make major changes to their loan systems.

Smith said that the world is changing and banks need to change with it.

“The FDIC has found that 13.5% of all households are underserved by their primary banking relationship from a credit perspective, and 50% of those are 100% current on all their bills,” Smith said. “When you add to that the fact that we have an ever-increasing number of thin files and credit invisibles, and 65% of millennials don’t have credit cards, and you look at the gig economy, you have to come to a place where you say credit has to shift together with changes in the economy and who we are as consumers.”

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