Future AI Developments Could Make Your Credit Score Obsolete

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This article was written by Frederik Bussler, consultant and analyst.

About one in four American adults are underbanked, meaning they are underserved by traditional finance and dependent on high-fee alternative financial systems. For underbanked Americans, getting a loan or a credit card can be difficult or nearly impossible. For those who have a credit rating, it is often not very high. As a result, these Americans are turning to money orders, payday lenders and check cashing services.

Underbanked Americans are far less able to “get ahead” financially, further perpetuating the cycle of poverty. To break this cycle, we must find a way to provide Americans in this position with equitable access to mainstream financial services. Without it, everything from paying bills and depositing checks to starting a business or renting an apartment is more difficult.

Traditional credit scores are outmoded and often irrelevant in today’s economy. They do not take into account data such as employment history and financial behavior, which are important factors in predicting credit risk. This is where artificial intelligence (AI) comes in and how AI could make your credit score obsolete.

AI enables better credit systems and early access to wages

AI can help lenders more accurately assess a borrower’s risk. It can do this by analyzing data not included in a traditional credit score, such as whether the borrower is spending their capital on necessities or luxuries. AI could also help lenders identify potential risk factors that may not be obvious, such as if a borrower is using too much of their available credit.

This means that in the future, AI may be able to completely replace traditional credit scores. This would allow more Americans, including those who are unbanked, to have access to traditional financial services. Additionally, it would help reduce the risk of lender default, which would lead to lower interest rates and fees.

For example, in the United States, the FinTech startup B9 raised $5 million to provide early access to market salaries. This service allows employees to receive their full salary 15 days earlier, without having to pay any fees. To do this, the company uses AI to predict a borrower’s risk level, powered by data such as the user’s paychecks, work history, age, and financial behavior. This way, by providing insight into their financial habits, customers avoid the high interest rates charged by payday lenders.

The traditional credit scoring model is a global problem. In Africa, for example, around 57% of the population is “invisible credit” – meaning they don’t have a bank account or credit score. As a result, these people find it difficult to get approved for a loan or a credit card. This is where the AI ​​comes in again. AI-powered credit tools like Weza and CredoLab leverage alternative data such as phone metadata to ensure everyone can access financial services.

Empower the underserved

These AI-based solutions empower the underserved by giving them access to traditional financial services. This, in turn, helps break the cycle of poverty and improve their ability to progress financially.

In fact, an analysis found that access to traditional financial services increased business presence in the region by 7.6% while driving higher levels of income. Indeed, traditional financial services allow people to save money, invest in their business and make purchases that they otherwise could not make.

AI makes it easier for lenders to assess a borrower’s risk, leading to lower interest rates and lower fees. This helps empower the underserved by giving them access to mainstream financial services.

Financial inclusion can even increase economic growth. A International Monetary Fund study found that for a country with a low level of financial inclusion, improving financial inclusion at the 75th percentile would lead to a 2% to 3% increase in GDP growth. Indeed, when more people have access to traditional financial services, they can participate more fully in the economy.

While AI won’t replace credit scores overnight, it clearly has the potential to do so in the future. It would be a game-changing development, as it would drop 1.7 billion people anywhere in the world access to traditional financial services.

Frederik Bussler is a consultant and analyst, with experience on innovative AI platforms such as Commerce.AI, Obviously.AI and Apteo, as well as investment offices such as Supercap Digital, Maven 11 Capital and Invictus Capital. He has been featured in Forbes, Yahoo, among others, and has presented to audiences such as IBM and Nikkei.

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