William Lansing, chief executive of FICO
Long before the word fintech came into vogue, there was FICO (Fair Isaac and Company). Set up in 1956 by a mathematician and engineer team of William Fair and Earl Issac, the company started off with the idea of applying analytics to problems to make better business decisions. What started off initially as a software firm graduated to financial services because, when money is involved, the stakes are bigger and businesses are more willing to pay for data-driven decisions. Through the 1950s, 60s and 70s, they would make analytic software for banks and financial institutions and, very often, it boiled down to a score that these institutions wanted to rank customers. This gave rise to the FICO score, which is the most widely used credit score in USA, and a software business, both of which bring in annual $900 million in revenue each.
In a conversation with Forbes India, William Lansing, chief executive of FICO, talks about the scoring as well as the software business and why analytics in business decisioning will only increase in the years to come.
Q. How did FICO evolve the credit score and why has it become so important to the financial services industry?
In the 1950s, 60s and 70s, FICO would work on analytic consulting engagements for banks, and other companies and very often what it boiled down to was building a scorecard so that they could score prospective consumers who are potential credits. In the 1980s, we had this idea that maybe we could get returns to scale and leverage by taking our analytics IP and putting it into software, instead of just doing everything as an individual consulting assignment. So that was one direction that we took, to build software to solve analytic problems for banks. And then the other direction we took was with the scores, where we were having so much success with individual banks buying the scorecards, we said, what if we produced a scorecard that the whole industry could use, and which will be available to them to buy through the credit bureaus.
Q. How does it work today?
If you have a credit card with a big bank, they report your repayment behaviour to the credit bureau. So the credit bureau builds a credit file and then we provide a mathematical algorithm to that credit file and produce a three-digit number, which predicts propensity to repay debt. That’s what the score does. And then other banks buy that score. When they’re thinking about lending to that individual, they say, oh well, is this a good credit or bad credit? Let’s go to the credit bureau and find out. And they buy the FICO score. That three-digit score is the thing that matters. Now what happened was this was very popular with lenders as a low-cost way of seeing who is creditworthy. So, it dramatically reduced the cost of lending and expanded the potential for lending.
Also read: Do consumers understand the cost of buy now, pay later?
Q. In addition to scoring customer credit, what else does the score do?
What we do is we build the score on other data, on Experian, TransUnion and Equifax (data), and we commoditise the data. So, this score was the same regardless of which data you use, so the same odds to score ratio, the same risk profile at any three-digit number, regardless of whose data you’re using. You can imagine how popular that was with the lenders. They’re like, this is great. Now we have more leverage over the bureaus, and we get to build our systems around this risk profiling tool. Then you have the regulators, and they know they’re trying to figure out how do you regulate these banks? How do I know how much risk there is in each portfolio? And here is a readymade measure, and the banks are already using it to identify the riskiness of each consumer. So, the regulators start to demand it. They say, what’s the FICO score of this portfolio, what’s the FICO score of that portfolio? And before you know it, you have the lenders who want it, and now you have the regulators demanding it. Then, you know, fast forward to investors. So these financial institutions securitise their loans, and the investors say, what am I buying? I need to understand the riskiness of the paper I’m buying. It doesn’t take very long before the investors start to demand a FICO score, or they won’t buy the paper.
Q. How has FICO worked with Indian banks and financial institutions in helping them make better credit decisions?
With AU Bank, we have automated 30 percent of their vehicle loan decisions and so their disbursement is faster. There’s better accuracy. They’re working on rural customers and thin file customers. They’ve had a lot of success because of the FICO platform. Axis Bank is doing real-time decisioning for credit card over limits and so the customer gets a better experience. And then, for HDFC, the big boy on the block, the FICO platform has simplified home loan processes, so the processing for mortgage applications takes a third of the time it used to.