FICO is dead

Is FICO dead? I think so. Let me explain why.

In the last two years, we saw an explosion of “buy now, pay later” (BNPL) solutions. While this alternative model, which is particularly popular among Millenial and Gen Z, still only accounts for a relatively small portion of overall card spending, it looks like it won’t take too long to disrupt the multi-trillion dollars payments market. 

How does it fit with the way that credit risk is currently being calculated? It just doesn’t work!

These new ways of financing are challenging the old ways of calculating creditworthiness.

If you add these elements to the current context:

(1) About 80% of Gen Z use only debit cards to buy things;

(2) Millenials substantially decreased the amount they are borrowing since the start of the pandemic and with an increasing percentage that repaid their debts and is keeping the cash in their bank accounts – creating a liquidity trap for banks.

You then understand we need to get more creative also when it comes to underwriting.

How do you calculate a person’s future potential, from a credit standpoint, when FICO is no longer valid for two of the most relevant demographics in banking today? 

The time to radically rethink how we calculate credit risk is now.

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