Consumers’ financial lives have become fragmented among multiple banks, fintechs, and platforms. At the same time, digitization has delivered more data about customer behavior than ever before.
These factors have driven a push for alternative credit scores, which can encompass every aspect of a consumer’s finances and immediately adjust as changes occur. Block developed a proprietary tool for this purpose, Cash App Score, which the payments giant will now open to external lenders, via a partnership with Nova Credit.
Cash App Score was designed to incorporate vast amounts of real-time data from the Cash App ecosystem, including information on spending, saving, repayment, paycheck deposits, and peer-to-peer (P2P) activity. The objective is to create a detailed, holistic portrait of an individual’s financial health, which Block then uses to inform its underwriting decisions.
According to Block, the tool has been highly successful. In the firm’s lending platform, Cash App Borrow, Block said it approves roughly 38% more customers with the same loss rate as traditional credit scores.
Getting Creative With Payments
There are multiple factors driving a shift toward alternative credit scoring methods, but one of the most impactful has been the lingering macroeconomic pressure on consumers. Inflation, high interest rates, and uncertainty have pushed costs of living higher and caused credit card debt to soar to dizzying heights.
This has driven consumers to become creative—both in their budgeting and in how they choose to pay. For example, there has been a spike in buy now, pay later (BNPL) usage during the past few years.
While many may view BNPL as a tool to split big-ticket purchases into installments, there is mounting evidence that these tools are not being solely used for discretionary spending. Instead, consumers use installment loans to cover everyday expenses like groceries and gas, and many use BNPL to cover rent payments and utility bills.
Reducing Blind Spots
One of the longstanding criticisms of BNPL loans is they are often not included in traditional credit scores, which creates a substantial blind spot for potential lenders. Likewise, the growth in fintech platforms that offer financial services has made it even more difficult for lenders to gauge creditworthiness.
On the flip side, lenders have also begun to look beyond traditional credit scoring in efforts to expand their services. For example, mortgage giants Fannie Mae and Freddie Mac have both embraced alternative credit scoring and lowered their minimum credit scores in efforts to expand access to homeownership.
However, this approach has risks. The conventional credit scoring model was developed to protect lenders and has been largely effective for decades. While alternative credit scores can be a helpful tool, lenders should still utilize every resource at their disposal in an unpredictable lending environment.