Finexos on the credit scoring problem - Need for change

We were delighted to recently launch the EIS-eligible investment opportunity with Finexos, who are transforming credit scoring. Over 85% towards their target at the point of writing, we recently spoke to Mark Fisher, founder of Finexos, to understand just how big the credit scoring problem is.

"The debt system in the UK is woefully unprepared for the fallout of such a crisis"

In our Investment Memorandum, we provide some headline figures. 2 billion people globally cannot access financial services. 138 million people in Europe are now excluded from mainstream credit.

And these, even simply on the face of it, are immensely concerning.

But we need to bring it down to a specific country to fully see the impact of the current financial situation and the need for dramatic change in certain areas. And the UK is unfortunately a prime example where change needs to happen. 

Gaining access to credit is fast becoming a bigger problem than it ever has been for many consumers and SMEs now seeking to shore up their finances during the cost of living crisis. One in 10 families are now turning to food banks as the squeeze on personal finances continues.

Unfortunately, over 12 million people in the UK are now trapped in high interest credit, with high rates of credit card and overdraft utilisation. This means they're paying interest at rates well above those promoted by lenders - into double digits and beyond - on increasingly large balances. It's a merry-go-round that currently can be very difficult to get off of in a positive way.  

What's more, the reliance on credit and heavy advertising of 'Buy Now Pay Later' products - which have rapidly become popular as they give the impression consumers can afford to pay over a number of payments - is leading consumers into yet another trap.

When the situation is explored, one key metric appears to be overlooked on a constant basis - and that is affordability; the amount of money a consumer or SME can actually afford to spend.

With wages flat and as the cost of living crisis is fuelled by higher food prices, fuel, utilities and National Insurance Contribution increases, I firmly believe we are about to see an affordability crisis that will force more medium salaried workers into financial difficulties.

Yet the debt system in the UK is woefully unprepared for the fallout of such a crisis. The affect on legacy or traditional FICO-based credit scores will be severe, forcing millions more into making tough decisions in the form of Individual Voluntary Arrangements (IVAs) and debt relief orders. Both of these can be devastating to consumer credit profiles, despite assurances that consumers can write off up to 85% of debts and exit out of the agreement in as little as 12 months.

And this is one of the core reasons Finexos was founded, and why our Financial Capability Scoring (FCS) has been developed to help directly remedy the problem.

Financial capability scoring bases a credit decision around the consumers' ability to manage their finances and behaviours that indicate their willingness to make better decisions. Finexos is working to establish this new metric in the market (which, crucially, does not require a FICO based credit score) so that banks, credit unions and other lenders can help consumers and SMEs access affordable credit.

Looking at the situation from an existing credit perspective, refinancing higher cost credit using the system will free up hugely valuable cash flow that can be used to offset rising costs whilst making credit more affordable. It can subsequently provide the consumer with breathing space and a defined exit date, which is either self managed or assisted through AI-powered financial management tools provided through our proprietary software, designed to reduce cognitive load and stress for customers in financial distress.

Right now the market itself is distressed. FICO-based credit scores will exacerbate the problem and could very realistically soon force millions more into higher cost credit. Simply put, servicing debt will become more difficult over the coming year and beyond if the situation isn't tackled.

We are walking into a credit crisis here in the UK - let alone the rest of the world - and a better way to assess financial capability is urgently needed if we want to ease it in any capacity.

For full details of the Finexos EIS-eligible investment opportunity, view the online pitch here.