Credit Scoring And Blockchain — New Rating Agencies To Emerge

Credit scoring is a system that figures out a borrower's rating using mathematical methods. The personal data of the person or organization, credit history and statistics on borrowers with similar conditions are taken as parameters for such calculations.

The use of a big data is inevitable for the service estimating the risks when working with a specific borrower. Thus, credit scoring systems and credit history agencies become the largest operators of personal data, and thus they work closely together.

Isn’t it convenient?

For agencies, it’s rather convenient but not for users. In the areas where personal data is involved, the question of its safe storage is very urgent. Centralized storage is vulnerable and will always be a target for hackers. A large-scale leak of users’ database at one of the largest credit rating agencies confirms this. This "incident" is not an annoying misfortune as hackers continue to attack. Thus industry feels powerless to resist them.

Blockchain and cryptographic technologies can provide better protection of essential information. Сredit scoring is also a solvable problem for such systems. Moreover, there are companies where credit issuance also operates on the blockchain.

Permit data access: OK, Cancel, Ignore?

Credit agencies collect, store, provide upon request and sell user data to organizations which are interested in studying the financial condition of future customers.

Laws oblige to provide credit history reports upon the request of citizens. Nevertheless, this service can be obtained free of charge only a limited number of times. For example, in the United States once a year, in Russia twice a year, in India one once a year, in Australia — once a year. It turns out that the users' data (which is personal and very important) is a commodity that is traded by companies that collect and store it. And it is stored very carelessly.

Blockchain on its own is not a solution to this problem. In the classic distributed ledger, records are open to all users, and all communications, all transactions, and all member relationships can be tracked. But with the help of blockchain and cryptographic technologies, it is possible to create a system where the access to data is provided with digital identity systems, flexibly and safely.

Never took a loan? Oh, you are a lousy borrower

Algorithms for calculating the rating of scoring systems take into account the history of the relationship of a potential borrower with credit organizations: the size of loans, compliance with payment schedules, etc.

If a client didn’t have credits for various reasons (lived in an area where they were inaccessible, didn’t have a need, was too young, etc.), then the scoring system lowers his assessment. The refusal can even be accompanied by a recommendation to take another loan — a smaller one to replenish your credit history with positive actions.

There is no common sense in this practice. A store has no reason to refuse to sell a product to a person who has never bought such goods before. Modern computing systems that combine machine learning technologies, peer-to-peer communications, smart contracts, and blockchain can calculate the borrower's rating without lowering it due to the lack of credit history.

If you have just moved — be aware to start from the beginning

People’s movement across state borders is quite ordinary situation. But traditional credit rating agencies and scoring companies don’t consider a foreign borrower’s data to be relevant to the current situation. People face the fact that good credit history is reset to zero after the migration and everything must be started from scratch. In this case, blockchain technologies can prove themselves best. There are practically no boundaries for them as the movement of an individual across the world doesn’t affect the credit rating.

In a new location for a client of the blockchain credit scoring system, a sufficiently developed banking infrastructure may not be present. It won’t be a trouble if cryptocurrency payment systems develop — the bank offices will lose importance for the availability of credit products.

Borrowers without a bank account

Unbanked adults — this is the way they call people who don’t have a bank account and don’t use loans in microfinance institutions. There are about 1.7 bln unbanked adults around the world. For the banking system, these people are out of reach.

Most of the unbanked people live in poor and developing countries. The infrastructure of credit institutions will not expand there quickly enough — it is expensive and inefficient. People with low income will not receive credit products, since they don’t meet the requirements of banks, and scoring systems will not assign them a satisfactory rating.

Meanwhile, unbanked adults can potentially bring in about $380 bln in revenue — you just need to find a way to make loan products affordable for these people. In the US, 14% of the population falls into the category of “credit invisibility” since they don’t have a personal rating in scoring systems. This is an excellent potential even for the developed countries. Blockchain projects can also benefit from this potential. It's time to talk about companies that have already developed products for the credit scoring market and credit histories.

Colendi — blockchain credit rating and microfinance

This company was established in 2016 by Turkish and Chinese developers and was registered in Switzerland. The startup is a success and attracts funding: investors have already placed $2.5 mln in technology development.

Colendi is a project with a goal is to provide credit products to people who don’t have access to the banking system. The company's proprietary development is a set of algorithms that allows calculating the Colendi Score. This is the borrower's credit rating with a particular service — the client’s financial passport. With the help of this tool, the participants of the system open up opportunities for obtaining microcredits, shopping, and p2p financing.

The calculation of the Colendi Score is based on the analysis of a set of data (financial and non-financial) using machine learning technology. The technical base of Colendi is the Ethereum platform and its smart contracts. COD tokens are used to pay for borrowers credit rating requests.

Bloom — digital identity and risk-free credit scoring

The company was founded in 2017 in the United States. The primary purpose of the project is to facilitate the receipt of loan financing for people who have difficulties with access to banking products. Another one is to provide a modern, secure and reliable blockchain-based digital identity system.

Bloom has developed a protocol for digital identity, risk analysis and credit scoring based on the Ethereum platform. The three products offered by the developers are BloomID, BloomIQ and BloomScore. They are designed to create a digital user profile that is securely stored and allows to manage personal data flexibly. The system also provides monitoring, accounting, and recording of platform participants operations as well as counting and setting a particular Bloom user rating.

The company's customers register BloomID and they can control personal data in the system and choose a lender for a loan. The operation of the platform is not affected by the borders of the states; the provision of loans is possible in both traditional and digital currencies.

POINTS and Ontology — two East Asian blockchain finance systems

The POINTS project collaborates with the Ontology Network and aims to meet the needs of the Chinese market. The purpose of the company is to provide services for the cooperation of financial market participants (companies, institutions, and individuals) varying in size and structure.

The company received funding of $8 mln. Currently, a component of the system, the PTS Registry service application, is being developed. Integration with Ontology and Hyperledger platforms is completed.

In the future, the system will be able to maintain relationships of lenders and borrowers based on a proprietary protocol, providing a secure identification technology and a scalable, high-performance data exchange network.

What do officials think of blockchain credit scoring?

A registered patent submitted by Royal Bank of Canada describes a system for credit scoring and digital identity. It is based on crypto technologies and distributed ledgers, where storage, processing, and exchange of data between lenders and borrowers, with the use of universal identifiers and smart contracts is described.

The website of the Federal Reserve Bank of Atlanta analyzed the current situation in the market of credit scoring and credit histories, and also studied the prospects for its improvement using blockchain and machine learning technologies.

In the Indian state of Telangana, a local government in collaboration with Cognitive Technologies from the UK has launched a pilot program to introduce a credit scoring system for citizens who don’t have access to bank loans.

Still, it’s a hard way ahead

The blockchain technologies application is to become a new reality very soon. The shock of customers after database hackings, a large percentage of unbanked citizens around the world, the apparent benefit of the implementation — all of these factors tip the scales to the side of crypto community.

Many issues arise on the way to the global rise of blockchain credit rating agencies, and many problems have already been addressed. However, some of them are unknown because systems that work on distributed ledgers have limitations and weaknesses.

The public opinion cannot but support the blockchain revolution, and financial institutions and authorities have no reason to dispute the need for change. It is a chance that it would be a pity to lose.

Image courtesy of Coinnet