Credit scoring is a method that lenders use to predict the probability a borrower or counter-party will default on loans, or incur additional charges for repayment -- also known as measuring credit worthiness.
The method is a key tool in making credit affordable for individuals and businesses. It links credit products to risk potential, connecting borrowers to secondary capital markets and increasing the amount of funds available.
This securing process establishes risk predictability dependent on a number of factors, determined by financial indicators and other publicly available information reported by the credit bureaus.
Credit Score Market Development
According to the latest worldwide market study by Juniper Research, they now forecast credit scoring services will grow by 67 percent to $44 billion by 2028.
Juniper anticipates that emerging markets will experience the greatest growth -- projecting the African & Middle Eastern region to grow by 117 percent over the forecast period, achieving a spend of $3.7 billion in 2028.
Driving this significant growth will be the inclusion of alternative data into underwriting models.
Using input from sources such as social media activity and monthly utility bills enables lenders to expand into un-banked and under-banked populations throughout emerging markets.
This growth in emerging markets will open new customer segments and boost financial inclusion.
Juniper analysts urge the use of Open Banking within alternative credit scoring, enabling credit bureaus and other providers to access bank account transaction information.
This will help to enrich credit data, creating a holistic view of the consumer, and thereby determining a more accurate credit score.
Juniper expects the use of Open Banking within business credit scoring, as this technology can improve critical lending and access to finance for small and medium businesses.
"Open Banking can address numerous challenges, especially relating to cash flow and debt management. At present, the use of Open Banking in business credit scoring is lagging," said Cara Malone, research analyst at Juniper Research.
According to the Juniper assessment, it creates greater ease and transparency of sharing financial data, and elevates business credit scoring, thereby unlocking greater access to available lending sources.
Outlook for Credit Scoring Applications Growth
Alternative credit data and embedded scoring models are efficient means of boosting access to finance, and when combined with Open Banking and artificial intelligence (AI), they will grant access to new customer segments.
This will enable providers to help alleviate issues with thin files, where limited information is held on individuals and businesses, in both developing and developed markets, eventually enabling more accurate and predictive credit scoring.
That said, I believe accurate and reliable credit scores should allow more borrowers to obtain new credit options at competitive rates. Furthermore, increasing the availability of credit scoring may also help to streamline the typical credit lender application process.