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Applications of Blockchain in credit-scoringJan. 22, 2018, 11:03 a.m. GMT
Whether you’re applying for your first credit card or a loan, the bank will ask for your credit score. This number reflects your creditworthiness and therefore your risk of default. It is the merger of a number of inputs regarding your payment track record. Several experts believe such calculations are flawed. First, it is very unidimensional. Important factors may not be taken into consideration. Further, it creates perverse incentives for individuals. If I am a poor guy and cannot afford a credit card, I will mostly use cash or debit card. However, this will result in my credit score getting punished. Hence, I will try and get a credit card thereby further endangering my financial well-being, running the risk of entering into debt. Third, scores are quite delayed: it takes time to collect data and calculate the output.
Reputation is critical to success in business and otherwise. But how do you quantify reputation really and not imperfect proxies of it? How do you quantify it for billions across the globe where not much data or social ratification is available? Even where financial services are available to the global poor, many can’t produce the documents to be able to participate in the services. This is a problem in the western countries too. In 2015, many US banks rejected New York ID cards as a credential to open a bank account, despite the fact that the regulators had approved their use. Blockchain could solve these problems by enabling people to form unique identities with inputs that really matter, and can be measured accurately and instantaneously.
There are many use-cases of Blockchain's capability of introducing trust between parties when trust is needed. Blockchain technology will not just help the deserving get a loan but also help ensure that the loan is paid back in time with interest. And such identities on the Blockchain are built not just using one's financial transactions- even non-financial transactions and dealings can be used to create a persistent identity on the Blockchain that can be used as a gatekeeper for financial transactions.
Also, why do we need agencies to manage our credit scores? Today there are specific companies entrusted with the role and they do not always do a great job of either the calculation or safeguarding of the data. Blockchain will enable individuals to manage their own identity, and form navigates through the web of self-managed identities with confidence and trust. Every transaction will count towards reputation. Further, individuals will be able to take charge of aspects of their data, create multiple personas and also decide which persona interacts with which entity. You could provide access to different personas to your landlord and to your bank. Banks currently are often accused of accumulating more data than they need- this need not be the case in a Blockchain paradigm.
This model is beginning to work. Blockchain-based P2P lending platforms are beginning to use reputation as the basis for extending credit. Users can link their profiles to their social media or cryptocurrency trading profiles like Facebook, LinkedIn, eBay or Coinbase to be incorporated into their reputation scores. All information is kept private and users are empowered to build up a good score pretty quickly by getting references from friends, indulging in transactions etc. Blockchain powered credit-scoring is well and truly here.
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