Fintech

Credit scores are broken. Fixing them is an alluring but elusive opportunity.

Some fintechs think including more data and analyzing it with more advanced algorithms could solve the problem. Others say it’s time to build whole new systems.

A shoots and ladders-style game board with dollar signs on it

Finding a way to underwrite those excluded from the existing system could mean unlocking a whole new customer base for lending and investment products.

Illustration: Christopher T. Fong/Protocol

Credit scoring doesn’t work well for a lot of people. Those with low incomes, people of color and immigrants have been historically sidelined by the current system. Some of the nation’s most successful struggle with low credit scores despite their wealth. And if your fortune comes from crypto, you might as well be invisible to the current system.

Many startups see a business opportunity here. Finding a way to accurately underwrite those excluded from the existing system could mean unlocking a whole new customer base for lending and investment products. It also entails a lot of risk, as inaccurately assessing borrowers’ ability to repay can result in costly defaults.

Credit scoring is broken, but fixing it isn’t easy. FICO “is the dumbest system except for all the other ones,” Bullpen Capital general partner Eric Wiesen told Protocol. “Someone should clearly do this, but I am yet to find anyone successful at it.”

More data might be the answer. Rent or utility payments are not typically integrated into credit scores, for example. Some fintechs argue that doing so could improve many consumers’ scores.

“[FICO] is the dumbest system except for all the other ones.”

Some fintechs are collecting that kind of payment data and making it interpretable for the main three credit bureaus, Equifax, Experian and TransUnion — and hopefully thereafter integrated into a credit score. Fannie Mae, meanwhile, began considering rental payment history last year, while California, Colorado and Washington, D.C. have passed bills encouraging landlords to report positive rental payment history, and Delaware recently launched a rental payment reporting pilot program with stimulus funds. “Buy now, pay later” companies are also working to get their on-time payment data integrated into credit reporting.

Zest AI, meanwhile, primarily uses credit bureau and LexisNexis data to create its own score in place of FICO — a score that the company argues has less bias and is more accurate because its algorithm can include many more factors. “FICO, for example, uses credit utilization, and they might use credit utilization at a point in time,” chief legal officer Teddy Flo told Protocol. Zest’s model examines credit utilization over time instead.

But consumer advocate Rachel Gittleman, financial services outreach manager at the Consumer Federation of America, argues that credit scoring is broken not because it doesn’t factor in enough information, but rather because it factors in too much. Much of the information that is already tracked in a credit report is not predictive, she argues, like medical debt, which is a poor predictor of a consumer’s ability to repay because people do not choose to get sick and take on that debt in the first place. Adding more data doesn’t solve the problem of poor data that is already being considered, and it’s crucial that consumers are the ones to decide whether these additional data points are considered in their credit scores.

Further, the credit bureaus themselves have a reputation for misusing consumer data and making difficult-to-correct errors, and are the source of most credit scoring problems for consumers, she says. An alternative to FICO, she told Protocol, “doesn’t take power away from that existing system.”

That’s why some fintechs are instead attempting to rewrite the whole system. A fintech called Trust Science also uses AI to evaluate exponentially more data points than FICO does, but also collects and stores its own data, like a credit bureau. Many others tailor their underwriting process for the specific lending products they administer. Line, a company that issues small lines of credit for emergency expenses without a credit check, also uses its own proprietary process. “We feel people are better than a number,” Line CEO Akshay Krishnaiah told Protocol.

Most of these processes depend on reviewing transaction records from a user's bank account or a business's accounting software. FinRegLab research suggests that such cash flow underwriting can increase accuracy, particularly when paired with a review of traditional credit reports and especially for consumers without a credit history.

The space is loosely regulated, and the quality of underwriting varies. In a joint statement in 2019, the Federal Reserve, CFPB, FDIC, NCUA, and Office of the Comptroller of the Currency said cash flow underwriting is subject to fair lending laws, the Fair Credit Reporting Act and other prohibitions against unfair or deceptive reporting, while the CFPB will likely write a data-sharing rule for financial services within the next year.

“When we’re talking about companies that are not regulated or are not receiving oversight from the government, using new forms of underwriting — it has red flags all over the place.”

RealOpen — a crypto home brokerage founded by Christine Quinn of “Selling Sunset” and her husband, Christian Dumontet — is using a similar concept to prove the stability of the crypto holdings their clients use to buy homes. Their newly debuted scoring product, RealScore, requires clients to link their crypto wallets so the company can review the diversity of tokens in a home offer and assess whether its stability is “excellent,” “fair” or “risky.”

Though it doesn’t help clients procure loans with crypto — the brokerage only presents cash offers — it demonstrates the need for alternative scoring mechanisms. RealScore, Quinn said, started as a manual calculation. Systematizing that process gives it more legitimacy and makes it easier to interpret for real estate agents and brokerages they interface with that aren’t as comfortable with cryptocurrency. RealScore, opens the business to “broader market adoption,” Dumontet said.

If fiat cash flow underwriting is loosely regulated, crypto is the Wild West. Clear regulatory guardrails and industry standards are necessary to affirm any type of credit scoring is fair, transparent and sustainable, consumer advocates warn. “When we’re talking about companies that are not regulated or are not receiving oversight from the government, using new forms of underwriting — well, it has red flags all over the place,” Gittleman told Protocol.

Policy

Steel decided World War II. Chips will decide whatever is next.

“Chip War: The Fight for the World’s Most Critical Technology” foreshadows the coming battle between nations over semiconductors.

“Chip War” outlines the nature of the coming battle over semiconductors, showing how the power to produce leading-edge chips fell into the hands of just five companies.

Image: Scribner; Protocol

“World War II was decided by steel and aluminum, and followed shortly thereafter by the Cold War, which was defined by atomic weapons,” Chris Miller, a professor at Tufts University’s Fletcher School of Law and Diplomacy, writes in the introduction to his latest book. So what’s next? According to Miller, the next era, including the rivalry between the U.S. and China, is all about computing power.

That tech rivalry and the story of how the chip industry got from four to 11.8 billion transistors are all part of Miller’s book, “Chip War: The Fight for the World’s Most Critical Technology,” which comes out Oct. 4. “Chip War” outlines the nature of the coming battle over semiconductors, showing how the power to produce leading-edge chips fell into the hands of just five companies: three from the U.S., one from Japan, and one from the Netherlands.

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Hirsh Chitkara

Hirsh Chitkara ( @HirshChitkara) is a reporter at Protocol focused on the intersection of politics, technology and society. Before joining Protocol, he helped write a daily newsletter at Insider that covered all things Big Tech. He's based in New York and can be reached at hchitkara@protocol.com.

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Great products are built on strong patents

Experts say robust intellectual property protection is essential to ensure the long-term R&D required to innovate and maintain America's technology leadership.

Every great tech product that you rely on each day, from the smartphone in your pocket to your music streaming service and navigational system in the car, shares one important thing: part of its innovative design is protected by intellectual property (IP) laws.

From 5G to artificial intelligence, IP protection offers a powerful incentive for researchers to create ground-breaking products, and governmental leaders say its protection is an essential part of maintaining US technology leadership. To quote Secretary of Commerce Gina Raimondo: "intellectual property protection is vital for American innovation and entrepreneurship.”

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James Daly
James Daly has a deep knowledge of creating brand voice identity, including understanding various audiences and targeting messaging accordingly. He enjoys commissioning, editing, writing, and business development, particularly in launching new ventures and building passionate audiences. Daly has led teams large and small to multiple awards and quantifiable success through a strategy built on teamwork, passion, fact-checking, intelligence, analytics, and audience growth while meeting budget goals and production deadlines in fast-paced environments. Daly is the Editorial Director of 2030 Media and a contributor at Wired.
Policy

Musk’s texts reveal what tech’s most powerful people really want

From Jack Dorsey to Joe Rogan, Musk’s texts are chock-full of überpowerful people, bending a knee to Twitter’s once and (still maybe?) future king.

“Maybe Oprah would be interested in joining the Twitter board if my bid succeeds,” one text reads.

Photo illustration: Patrick Pleul/picture alliance via Getty Images; Protocol

Elon Musk’s text inbox is a rarefied space. It’s a place where tech’s wealthiest casually commit to spending billions of dollars with little more than a thumbs-up emoji and trade tips on how to rewrite the rules for how hundreds of millions of people around the world communicate.

Now, Musk’s ongoing legal battle with Twitter is giving the rest of us a fleeting glimpse into that world. The collection of Musk’s private texts that was made public this week is chock-full of tech power brokers. While the messages are meant to reveal something about Musk’s motivations — and they do — they also say a lot about how things get done and deals get made among some of the most powerful people in the world.

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Issie Lapowsky

Issie Lapowsky ( @issielapowsky) is Protocol's chief correspondent, covering the intersection of technology, politics, and national affairs. She also oversees Protocol's fellowship program. Previously, she was a senior writer at Wired, where she covered the 2016 election and the Facebook beat in its aftermath. Prior to that, Issie worked as a staff writer for Inc. magazine, writing about small business and entrepreneurship. She has also worked as an on-air contributor for CBS News and taught a graduate-level course at New York University's Center for Publishing on how tech giants have affected publishing.

Fintech

Circle’s CEO: This is not the time to ‘go crazy’

Jeremy Allaire is leading the stablecoin powerhouse in a time of heightened regulation.

“It’s a complex environment. So every CEO and every board has to be a little bit cautious, because there’s a lot of uncertainty,” Circle CEO Jeremy Allaire told Protocol at Converge22.

Photo: Circle

Sitting solo on a San Francisco stage, Circle CEO Jeremy Allaire asked tennis superstar Serena Williams what it’s like to face “unrelenting skepticism.”

“What do you do when someone says you can’t do this?” Allaire asked the athlete turned VC, who was beaming into Circle’s Converge22 convention by video.

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Benjamin Pimentel

Benjamin Pimentel ( @benpimentel) covers crypto and fintech from San Francisco. He has reported on many of the biggest tech stories over the past 20 years for the San Francisco Chronicle, Dow Jones MarketWatch and Business Insider, from the dot-com crash, the rise of cloud computing, social networking and AI to the impact of the Great Recession and the COVID crisis on Silicon Valley and beyond. He can be reached at bpimentel@protocol.com or via Google Voice at (925) 307-9342.

Enterprise

Is Salesforce still a growth company? Investors are skeptical

Salesforce is betting that customer data platform Genie and new Slack features can push the company to $50 billion in revenue by 2026. But investors are skeptical about the company’s ability to deliver.

Photo: Marlena Sloss/Bloomberg via Getty Images

Salesforce has long been enterprise tech’s golden child. The company said everything customers wanted to hear and did everything investors wanted to see: It produced robust, consistent growth from groundbreaking products combined with an aggressive M&A strategy and a cherished culture, all operating under the helm of a bombastic, but respected, CEO and team of well-coiffed executives.

Dreamforce is the embodiment of that success. Every year, alongside frustrating San Francisco residents, the over-the-top celebration serves as a battle cry to the enterprise software industry, reminding everyone that Marc Benioff’s mighty fiefdom is poised to expand even deeper into your corporate IT stack.

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Joe Williams

Joe Williams is a writer-at-large at Protocol. He previously covered enterprise software for Protocol, Bloomberg and Business Insider. Joe can be reached at JoeWilliams@Protocol.com. To share information confidentially, he can also be contacted on a non-work device via Signal (+1-309-265-6120) or JPW53189@protonmail.com.

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