A short summary of case studies
FICO, the U.S. analytics software company, recently announced that bank account transactions add a lot of value in credit scoring. Previously, transaction data has been a luxury that only retail banks could afford, but today any lender is able to get this data via third-party banking APIs or directly from banks, as soon as Payment Services Directive 2 (PSD2) in Europe and Open Banking initiative in UK comes in to full force.
It feels obvious that transaction data can explain a lot about loan applicant's financial health, but in practice its biggest weakness is preparation — its possible to extract value from just account turnover and balances, but if you want to get higher uplifts, you'll want to categorise transactions and engineer features that capture effects not currently captured by your existing data sources.
This is where many data teams give up. All this categorisation and feature-engineering takes too much time.
What inspired us to keep researching the area of transaction-based behavioural scoring, despite it's steep learning curve, was the fact that there is real evidence of the positive impact it can have on lending decisions.
Below we've compiled a short list of research and case studies in the area of transaction-based behavioural scoring.
Mastercard found a 10–15% uplift in KS
4Finance together with Instantor found a 4–7 percentage point GINI uplift
FICO and Westpac found $6 million per year in increased revenue and reduced bad debt expense
MIT Sloan found cost savings ranging from 6% to 23% of total losses
N26 in Germany and Spain
Idea Bank in Poland
Kreditech across multiple countries, including Spain, Mexico and Russia
Deutsche Handelsbank in Germany
Solaris Bank in Germany
Deutsche Kreditbank in Germany
To conclude, there are real-world examples that transaction data can add value to traditional credit scoring models. It's true that the field still seems to be in its early stages, but you can be sure that the easy access to transaction data means that more and more lending companies will be investing in this area, looking for a competitive edge.
Here’s what we've been up to recently.
In recent years, tech giants like Apple, Google and Amazon have started planting flags in the financial sector, intruding on traditional financial institutions. Facebook is finally joining the race with Libra, its digital currency described as a “simple global currency and infrastructure that empower billions of people.”
As a society, we are gradually moving away from paper cash, increasingly gravitating towards alternative digital payment methods - contactless-cards, cryptocurrency, mobile and wearable technology. Regulatory driven initiatives like EU's PSD2 and UK's Open Banking are propelling financial innovation and enabling the emergence of new products and services.