The ICCR, the recognized international standard setter in credit reporting and of which BIIA is a founding member, has published a guidance note covering approaches to credit scoring.

On the guidance on approaches to credit scoring, Neil Munroe, Deputy Managing Director of BIIA who is also Deputy Chair of the ICCR and who was part of the Committees Credit Scoring Working Party writes:

Credit scoring is widely understood to have immense potential to assist in the economic growth of the world economy. Additionally, it is a valuable tool for improving financial inclusion; credit access for individuals and micro, small, and medium enterprises; and efficiency.

The use of credit scoring and the variety of scoring has increased significantly in recent years owing to better access to a wider variety of data, increased computing power, greater demand for improvements in efficiency, and economic growth.

Furthermore, the application of credit scoring has evolved from traditional decision making of accepting or rejecting an application for credit to inclusion of other facets of the credit process such as the pricing of financial services to reflect the risk profile of the consumer or business and the setting of credit limits. Credit scoring is also used to determine minimum levels of regulatory and economic capital, support customer relationship management, and, in certain countries, solicit prospective consumers and businesses with offers.

The methods used for credit scoring have also increased in sophistication in recent years. They have evolved from traditional statistical techniques to innovative methods such as artificial intelligence, including machine learning algorithms such as random forests, gradient boosting, and deep neural networks. In some cases, the adoption of innovative techniques has also broadened the range of data that may be considered relevant for credit scoring models and decisions.

The opportunities of using innovative methods for credit scoring include greater financial inclusion and access to credit, improvement in the accuracy of the underlying models, efficiency gains from the automation of processes, and potentially an improved customer experience.  However, the use of innovative methods for credit scoring also raises concerns about data privacy, fairness and potential for discrimination against minorities, interpretability of the models, and potential for unintended consequences because the models developed on historical data may learn and perpetuate historical bias. That said, there are also risks to consumers and businesses from a lack of innovation in credit scoring if it hinders improvements in financial inclusion and risk assessments.

There are also concerns about the effectiveness of credit scoring methods and technologies. These concerns apply especially in markets with weak or no adequate regulatory oversight or industry codes to regulate the conduct of credit services providers (CSPs).

The guideline which can be accessed on the World Bank website via the following link http://pubdocs.worldbank.org/en/935891585869698451/CREDIT-SCORING-APPROACHES-GUIDELINES-FINAL-WEB.pdf  recognizes that the technologies supporting innovative credit scoring are still evolving and that differences in use, accuracy, and robustness exist across markets. For example, in emerging markets, CSPs may still be operating on the basis of the credit officer’s individual judgment, judgmental scorecards, or using traditional regression models at most.

The talent and data infrastructure required to execute the more innovative approaches are still very limited in many markets.

The guideline encourages the adoption of a human-centric approach, where innovation is applied with the human in mind and puts forward seven policy recommendations to guide on credit scoring, encompassing both models and decisions, to help regulators in their oversight roles and to aid in promoting transparency.

About ICCR:

The ICCR is the only recognized international standard setter in credit reporting. The Committee is a responsible to (i) further develop the international agreed framework, (ii) identify areas of further consideration and (iii) devote resources to the elaboration of papers, reports, guidelines and other relevant materials that will effectively support the adequate implementation of the General Principles. The ICCR supports a forward looking and broad approach to specific issues while achieving consensus in policy aspects that affect public interest. To this end, the ICCR has developed the General Principles for Credit Reporting (2011), the report Facilitating SME Financing through Enhanced Credit Reporting (2014), The Role of Credit Reporting in supporting Financial Regulation and Supervision (2016) and the Policy Brief on Credit Reporting Contribution to Financial Inclusion (2017). All these documents are part of the Standards and comprise the framework for credit reporting systems.

To learn more about the ICCR click on this link: https://www.worldbank.org/en/topic/financialsector/brief/international-committee-on-credit-reporting