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Why Elevate Credit created an in-house think tank

A think tank is normally associated with academic institutions or consultancy firms, but one financial technology company is doing its own research to stimulate debate about credit inequality while boosting its brand at the same time.

Elevate Credit, an online lender, offers small-scale (between $500 and $3,000) loans to non-prime borrowers, or people who have credit scores lower than 700. Elevate, which went public last month, decided to take the research it does on its target market and publish it publicly through its in-house think tank, the Center for the New Middle Class. The research is published on the Center’s website and its findings have been fodder for stories in mainstream media outlets, including Business Insider and Bloomberg.

“We get reams of data to understand the best way to underwrite a customer but what we needed to do is humanize the data,” said the Center’s executive director, Jonathan Walker. “We needed to find a way to understand the stories behind the data to help better identify the products and services that are necessary.”

Beyond traditional credit scores, Elevate Credit looks at data including transactional history and utility bills to offer credit to people who otherwise would be overlooked by the banks. Walker said Elevate set up the Center in October after discovering that its typical customer doesn’t fit the stereotype.

“What’s really driving people into the non-prime space is out of their control — it’s often because of job losses or unexpected expenses like medical bills,” Walker said. “Too many people talk about the non-prime consumer as being lazy or careless or just uneducated, and the reality is far from that.”

The Center is located in Elevate’s corporate offices in Fort Worth and employs five Elevate employees who crunch the data on a part-time basis. The team comes from backgrounds such as market research, data analytics and sociology. Elevate uses data from surveys and focus groups it organizes and insights from its 100,000-plus customers. The Center’s output often takes the form of reports focusing on how the target population manages money. For example, based on a survey of 600 non-prime Americans, Elevate did a study that looked at how they handle emergency expenses. Another study looked at how often non-prime populations keep watch over their transaction history and credit scores.

Walker said what motivated Elevate to create the Center was the lack of research on credit inequality, with most studies focusing on income inequality. Since not all non-prime borrowers are poor, conclusions from income inequality research aren’t always applicable to those who can’t access credit.

“If you apply an income inequality solution to a credit inequality problem you don’t solve the problem at all,” he said.

As the research arm of a business with a stake in the findings, some may question the objectivity of the conclusions, but Walker said the company wants the Center’s content to stimulate debate about policy issues — a move that ultimately boosts the brand.

“What we hope is that the Center content is engaging thought leaders, whether it be academics, journalists and policy makers, and we also are hoping to get a broader audience of people who are interested.”

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Why the future of credit could lie in ‘social vouching’

With the growing number of tools to bring people out from the world of check cashing into the mainstream financial system, the notion of inclusion continues to be a major theme in the field. But to technology developers working on ways to enhance access to credit, the future lies in rethinking what’s meant by financial inclusion.

“The question around the unbanked makes the normative judgment that being banked is a state to be in,” said Om Kundu, founder of Inspirave, a platform that lets users save for big-ticket purchases. Kundu was one of three panelists that spoke on technology and financial inclusion at Fordham University’s social changemakers conference Monday — part of FinTech Week taking place in New York. “There are lots of parts of the world where people are getting access to financial services without a bank account — it’s more about helping you achieve your goals.”

For Kundu and others working in the space, ‘inclusion’ is more about creating a another kind of credit system that’s based on social vouching and support. Inspirave’s platform, Kundu said, brings in the notion of a social network of friends and family that can help an individual reach their financial goals and in turn, help vouch for the individual. Instead of a formal credit score, the idea of using a social network of referees acts as a powerful counterpoint to traditional credit assessment systems that exclude millions of Americans who don’t have bank accounts or credit cards.

“We don’t think of traditional due diligence of loan underwriting, a formal business plan or technical due diligence,” said Kelly Chan of Kiva U.S., a nonprofit that’s the U.S. arm of a global online marketplace for crowd-funded small-scale loans. “We’re looking to a social community knowing you have a group of supporters to back you or vouch; for example, ‘Sally is a wonderful mother worthy of Kiva loan.'”

The notion of ‘social underwriting,’ Chan said, can create economic opportunities for Kiva’s 3,700-strong community, many of whom are small-business owners. Traditional banking tools also often don’t address personal finance needs of the lowest-income Americans, particularly those at the lowest rung of the income scale. For Jeff Kaiser, chief operating officer of Propel, a startup that developed an app to track food stamp account transactions, providing accessible tools is key.

“It’s about building better products and understanding the needs [of the users],” he said. “It’s not about passing judgement from the formal financial space — we need to build products that are less expensive and provide convenience in a digital format.”

Despite the ‘do good’ objectives, building a sustainable revenue model can make or break any startup. Propel is not currently generating significant revenue, Kaiser said, but the company is working on deals with merchants who could advertise within the app. While Inspirave’s revenue is based on partnerships with merchants and banks, the future, said Kundu, will be more about monetizing the data.

“People are articulating their future purchases and that’s valuable — we expect to harness insights to partner merchants and financial institutions.”

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Are you too neurotic? Lenders test personalities to determine loan eligibility

Bad credit makes it tough to buy a home or a car. But in some places, having the wrong personality may also complicate your financial life.

When no credit history is available, lenders in emerging markets are increasingly looking to personality tests to fill the gap. Psychometric data, or data acquired through personality tests, is now being used to determine if customers qualify for credit in countries like Turkey, Russia, Mexico and India. Some assessors look at traits like conscientiousness, extroversion, agreeableness and neuroticism. For example, if someone ranks high on conscientiousness, they’re likelier to be better at saving, thus more secure financially.

The method has yet to go mainstream in the U.S. in part due to culture, regulations and the range of data already available to American lenders.

Still, psychometric data offers another option to assess consumers for whom insufficient data is available to generate a credit score. It’s a section of the population that’s gained more attention in the U.S., where over 25 million people are considered unscoreable by the Consumer Financial Protection Bureau.

“It’s about the values that underlie the actions that you take,” said Clare McCaffery, managing director of Coremetrix, a U.K.-based company that works with credit bureaus, lenders and insurers in India, South Africa and U.K. “I put money aside each month on the chance that I get unemployed. I have a good credit file because I’m conscientious — it’s not an accident that that happens.”

By assessing a consumer’s thought processes, McCaffery said, lenders are able to determine if a customer is eligible for a loan. Coremetrix evaluates customers through a quiz. Customers click on the image that best represents their response, and the questions are meant to assess values rather than generate right or wrong answers. In addition to assessing what’s driving the decision, CoreMetrix looks at biases as well.

Over 700 characteristics are organized; results are crunched along with repayment data into a number that represents a credit score.

Other evaluators use surveys to help lenders make decisions. The Entrepreneurial Finance Lab, a company that began as a research project at Harvard’s Kennedy School of Government, uses a survey that tests behavioral traits.

Bailey Klinger, executive chairman, said the lab’s score is based on how a candidate answers the questions, how they interact with the survey (how long they spend on each question), and how previous respondents have performed with credit products.

For example, the below question asks participants to rank on a sliding scale what picture represents the people in their communities. Depending on how someone answers, they could be seen as obsessive or disorganized.

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A sample Entrepreneurial Finance Lab question assesses perceptions.

McCaffery and Klinger stress that the surveys and quiz questions are not meant to yield right or wrong answers. Consumers are asked to react to a set of general questions that offer a peek into their thought processes or habits. For instance, sample questions from the Entrepreneurial Finance Lab ask the consumer to use a slider button to show how comfortable they are with technology, and another asks about how they spend their money. Coremetrix’s sample questions address emotions, such as “when you feel overwhelmed with making a decision, what do you do?” Respondents then choose from a range of pictures showing a range of emotional reactions.

It’s possible to cheat or be dishonest with models, but testing companies say they’ve accounted for this in their scoring models. For instance, on the Entrepreneurial Finance Lab test, respondents may be asked to list a series of numbers by memory that appeared earlier on the test. They’re told they can’t go back and check what the numbers were, but the test allows respondents to go back and cheat — the system tracks whether or not they do. McCaffery said that it’s possible for people to be dishonest with their choices on the Coremetrix test; however, multiple examples of questions that correspond to one personality characteristic are included on the test to minimize dishonesty. Coremetrix, like the Entrepreneurial Finance Lab, also monitors how much time the test taker spends on each question.

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Coremetrix focuses on emotional imagery.

The global unscoreable population is huge, including in India where over 70 percent of the 1.2 billion-strong population fall into this category, McCaffery said. While psychometric data has shaken up the credit-scoring game in emerging markets, it has yet to go mainstream in the U.S., and those with experience with U.S. credit bureaus say it has a lot to do with strict rules credit bureaus must follow, and a culture that may not lend itself to credit scoring psychometric tests.

For the past few months, FICO, working with the Entrepreneurial Finance Lab, has been testing psychometric testing in Turkey, Russia and Mexico. While it’s too early to offer definitive assessments, FICO is optimistic about the model’s ability to deliver results.

“They have many proof points around the world,” said Sally Taylor-Shoff, svp of scores at FICO. “The partnership is so that FICO can get more experience with the validity of this type of data.”

Before launching psychometric data in the U.S., Taylor-Shoff said lenders would need to ensure compliance with regulations including those on consumer disclosure (e.g. being able to explain to someone why they were denied credit); fair lending (making sure the method doesn’t disadvantage a particular type of customer) and safety and soundness of the data. Operational considerations, including how lenders would use this method alongside traditional methods , would still need to be resolved too.

Beyond regulation and process hurdles, others in the space question whether the U.S. is actually ready for psychometric testing as a credit assessment tool.

“U.S. consumers are not going to submit to a psychometric analysis by their lender,” said Zeydoon Munir, founder and CEO of RevolutionCredit, a startup that uses behavioral data garnered from quizzes and games, in addition to traditional data, to determine if customers qualify for certain credit products. “Who would do that?”