Fintechs Pushing for a Better SMB Credit Scoring Model

The notion of using technology to do a better and faster job of assessing the creditworthiness of small businesses is gaining steam for a variety of reasons. Small business capital needs have been intense since the start of the pandemic. And banks have historically done a poor job of serving small businesses. They don’t like giving out small loans. It’s less work, less risky, and more lucrative to give out one big loan vs. 10 small loans. And when they are willing to lend, they haven’t been good at figuring out a business’s true creditworthiness.

This gap has produced an entire subset of the fintech industry aimed at using tech, in particular AI, to efficiently and effectively approve and distribute loans to SMBs. There are a lot of these companies. Kabbage (acquired by Amex), Fundbox and others have filled the void. Also, payments platforms like Square and PayPal have added lending their portfolios. It’s a natural extension for companies that sit on top of the revenue and expense flows of a small business. Whois in a better position to assess the financial health of a small business?

Given how these fintech companies have mastered using tech to streamline lending, it’s no surprise that they have become the go-to platforms for distributing PPP money the COVID crisis.

Enter the Unique Credit Score

The notion has emerged recently to create a new mechanism for assessing SMB creditworthiness. In October, we wrote about a company called Flowcast, which has a product called Tillful, that uses AI to devise an entirely new credit scoring mechanism for small businesses.

Will Kabbage Deal Help Improve Amex’s Image with SMBs?

This is what we wrote about Tillful back then.

Tillful…doesn’t provide easier access to existing business credit scores. Rather it has created a brand new credit score. So instead of “what’s my Equifax score”, Ken wants businesses to ask “What’s my Tillful score?” And unlike with other platforms, the Tilfull score will be free and fast. And Ken argues it’s also a more accurate reflection of the small business owner’s creditworthiness.

“What makes it possible now than say five years ago is the access to technologies that can build robust credit models,” Flowcast CEO Ken So said. “Tillful leverages the company’s advanced machine learning solution that has been trained and validated in partnership with some of the world’s most innovative financial institutions. The result is a completely new credit scoring that is fast and fair.”

As Ken explains, Tillful makes money by generating referral fees from lenders for approved loans. The company also generates licensing fees from lenders for its AI technology.

Flowcast’s Tillful Aims to ‘Democratize’ Small Business Credit Scoring

Fast Forward to 2021

A major drawback to the traditional credit scoring model for SMBs is how slow it is. It takes a long time for legacy agencies like Experian to build a credit profile on a small business. For new businesses, this means little or no traditional access to capital, other than perhaps borrowing against personal assets. The combination of a huge expansion of available data (from online banking statements to Amazon transactions) and the technology to sift through its for insights has made a new credit scoring model possible. That’s what Tillful has built.

Since we wrote about them in October, Flowcast has found some traction using Tillful in partnership with banks to improve the science of predicting which creditors will keep up with loan payments. And which will not. Last week we learned that the bank ING has moved ahead with just such a program using Tillful and has invested $3 million in Flowcast.

We also came across this announcement from financial data firm Aliya involving a new credit scoring instrument called aScore. Here is how it describes the new alternative credit scoring tool.

“aSCORE uses high-frequency and more recent consumer attributes to better predict a borrower’s ability and willingness to repay a debt. The model runs on anonymized credit bureau data; it does not require the transfer of any personally identifiable information, or any other proprietary data sets of an institution, to Aliya.”

What’s clear is that technology is outpacing the methods of legacy credit scoring models. These new emerging tools presumably will improve financial inclusiveness for small businesses and consumers, which are more often than not the same thing. Will this movement help more businesses form and grow? And will these emerging alternative models pressure the legacy scoring agencies to modernize their methods? We’ll keep an eye on it.

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