How Do Consumers React to Psychometric-Based Credit Scoring?
Nearly 50 million Americans and literally billions more around the world have limited access to affordable credit, due primarily to a lack of credit histories. This segment of the population, commonly known as the underbanked, are disproportionately represented by racial minorities and millennials, and are at a significant disadvantage for financial wellness because of their lack of credit. Without credit, they may be unable to attain the critical financing for unexpected expenses such as a sickness or an urgent repair, for example, and may not be able to purchase a new home or fund a business. Ultimately, not only do the underbanked suffer personally, but so does the growth of the economy on the whole.
Moreover, it is important to understand that many underbanked individuals are actually in decent financial standing, and are well deserved of credit – they simply do not have sufficiently mature credit scores, and are therefore considered to be a high risk. Indeed, among the underbanked are potentially very valuable customers who are being overlooked by financial institutions who base their risk assessments only on traditional credit scores.
Advantages of Psychometric Credit Scores
It is for these reasons that facilitating financial inclusion among the underbanked via the use of alternative credit scores has gained popularity in recent years. As I discussed in a NextBillion piece earlier this year, one interesting new approach to alternative credit scoring that has shown particular promise is personality-based credit scoring. Personality-based credit scores are unique in that they tap key character traits that are important for good borrowers’ behaviors, such as trustworthiness, responsibility, risk taking, commitment and more. Personality-based credit scores typically use psychometric questionnaires and machine learning to analyze patterns of responses and response times to questions regarding behavioral preferences.
Psychometric scores complement financial data, and are unique in that they do not require credit histories. As such, they can score just about anyone, and are also not subject to the errors often associated with third-party data sources and bureau scores. Overall, psychometric credit solutions can effectively give underbanked applicants an additional opportunity to prove their creditworthiness in a way that is not related to their credit histories.
Challenges of Psychometric Credit Scores
Psychometric scores are not without their challenges, however. Perhaps the most salient challenge is related to the candidate user experience – specifically with respect to the administration time. Whereas typical credit scores are calculated on an ongoing basis by centralized credit bureaus, without directly engaging the consumer, psychometric solutions require the active participation of the consumer to complete the relevant questionnaire. And so, even though some psychometric solutions take just a few minutes, when most lenders strive for fast approval processes, this extra time might be perceived as a hindrance.
On the other hand, underbanked consumers are de facto at a greater risk of being declined, and thus likely realize that their application process may require additional time compared to some other applicants – especially if it can improve their chances of being approved. In fact, they might also consider it an advantage to be given the opportunity to provide new personal firsthand information, rather than being scored by a “black box” of third party data.
Consumers’ Perceptions of Alternative Credit Scoring
Little research is available on applicants’ perceptions of alternative credit scoring in general, and psychometric credit scoring in particular, but recent findings indicate that consumers may view them quite favorably. According to a 2019 survey by The Harris Poll and ZestFinance, many consumers are frustrated with the status quo in credit scoring. The survey found, for example, that 70% of U.S. consumers say it is difficult finding lenders who will look beyond their credit scores, and 60% believe their credit scores do not properly represent who they are as a borrower. In addition, based on that survey, it seems that most consumers are willing to do something about this situation. In fact, as many as 70% of Americans would be willing to give up more personal information if it resulted in a fairer credit decision, and the same percentage also wish there was another way to prove themselves to lenders outside of the standard credit score.
The Harris Poll did not specifically inquire about psychometric credit scoring, but their results could suggest an openness to the approach. On the other hand, psychometric solutions ask unique questions that may be perceived differently than other alternative credit methods. Specifically, psychometric questions are behavioral by nature, and not directly related to economic factors (e.g., income and debt). So it is important to make sure that the questions remain appropriate to the context of lending, and are non-intrusive.
How Consumers Feel About Psychometric Credit Scoring
Worthy Credit by Innovative Assessments (IA), a fintech startup that I co-founded a few years ago, is an example of a psychometric-based questionnaire for credit scoring that asks questions around a person’s behavioral preferences related to certain financial scenarios. For example, a person may need to choose their preference to two equally desirable statements, like: “I organize my finances carefully” and “I avoid risky financial situations.” Worthy Credit only asks questions that are domain-relevant to credit and finance, and there are no cognitively difficult questions and no right or wrong answers per se. In this way, the questions are designed to be non-invasive and appropriate, to avoid applicant drop-off. Indeed, IA boasts drop-off rates of less than 10%, and positive applicant feedback data.
Furthermore, when directly surveying feedback from a sample of 584 consumers from the U.S. and U.K., IA found that 73% of the respondents said they would be willing to answer similar questions as part of a loan application. In addition, as many as 87% felt that IA’s particular psychometric questions are non-invasive, and also relevant and appropriate to ask as part of a loan application. In fact, the majority of respondents (57%) felt that such questions would help to make the loan application process fairer by introducing new non-financial data. In terms of the time length, about half (53%) said they would be willing to spend (at most) up to 10 minutes on such questions, even though Worthy Credit takes only about four minutes.
Interestingly, these results were consistent across traditional credit score range categories (i.e., not just among higher-risk borrowers). Finally, in a subsequent survey of over 5,000 IA consumers in Latin America, as many as 65% said they would recommend lenders who ask similar psychometric questions, if they could be used to help approve more loans.
Overall, it appears that consumers may have a positive perception of psychometric credit scoring, as part of a loan application. Of course, different psychometric tools may elicit different responses – depending, among other things, on their administration time and the content of their questions. Nevertheless, given the current positive applicant feedback, and assuming that the psychometric scores themselves can be used effectively to help lenders approve more loans, it seems that they could be a valuable addition to the underwriting process, especially among the underbanked.
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