One of the distinguishing financial services-related characteristics of Gen Yers is their awareness and understanding of the concept of the “credit score.” My generation didn’t know what a credit score was, let alone what our individual credit score was, when we were in our 20s (OK, that wasn’t really fair, since the FICO score wasn’t introduced until 1989 when most Boomers were already in their 30s),
It wasn’t until recently that Americans truly became aware of what a credit score was, and how it impacted the interest rate they got on their credit cards and loans. Excellent services — Credit Karma comes to mind — have emerged to help consumers track their credit score, and understand how their financial-related actions impact their credit score.
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But the credit score is a tool that financial institutions use to rate consumers’ creditworthiness. From a consumer perspective, it’s not a useful financial management or measurement tool.
Based on their financial behaviors, my in-laws probably have a lousy credit score. And I doubt they could care less. Getting credit from a financial institution isn’t something they’re too worried about getting. Yet, you and I should be so lucky to be in as good a financial situation as they are.
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Exactly how well are they doing? And how much “better” are they doing, financially, than you or I?
I don’t know the answer to those questions because there is no universally-accepted score (think of it as a FinScore) that measures this.
What I do know is that we need one. “We” being both consumers and financial institutions.
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I couldn’t tell you if this is the case in other countries, but Americans LOVE to grade and score things. We brag about our SAT score, our college GPA, our Klout score, even our cholesterol score. We love to know how we’re doing, and how we’re doing relative to everyone else.
How much money we make (annual income) has historically been the metric of how well we’re doing financially, but if you have a $500k mortgage and 3 kids between the ages of 10 and 20, you’re not doing as well as someone making the same amount who has no kids and no mortgage on the identical house to the one you own. Or maybe based on other factors and behaviors, you are. Who knows?
So we need — we want — a FinScore. There are some firms working on this. Moven has its CRED score, and FlexScore has its eponymous score.
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Conceptually, this is exactly what we want: A score. A single number that tells us how we’re doing. Having talked to the founders of FlexScore, I know that they’re building a lot of depth into the score to show how various financial actions or behaviors impact the FlexScore. And I know that Moven is validating its methodology for how it calculates the CRED score with real-world results.
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Practically speaking, though, no matter how good (i.e., accurate) the CRED or FlexScore is, the challenge for the two firms — and anybody else who wants to create a score — is getting that score to be universally-adopted.
The quality of the score isn’t really the most important thing here. If you want proof of that, I have one word for you: Klout. A ridiculous metric that doesn’t really measure influence at all, yet has become a widely adopted score.
The success of either firm to have its score become the accepted score will be dependent upon the success of their respective marketing efforts.
An established, more widely known FI may try to develop its own score, but that effort is likely to run into the “what’s the ROI of this initiative?” mentality that kills plenty of potentially good ideas at banks.
Maybe the CFPB could help to develop this score (call me anytime you want to discuss this, Mr. Cordray).
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Although I don’t see any existing bank doing it, it’s in the best interest of banks and credit unions to see a widely-accepted FinScore emerge.
Here’s why: The next wave of banking competition is competing on performance. That is, who best helps the customer manage and improve their financial lives — and not who has the best rates or fees, or who claims to have the best service (whatever that means).
In order to prove that it’s actually helping customers improve their financial lives, a bank or credit union needs a commonly accepted metric. A FinScore.
With a universally accepted FinScore, consumers will be able to make educated decisions about who to do business based on: 1) How important improving their FinScore is to them, 2) Which FI promises to best improve that FinScore — and ultimately delivers on that promise, and 3) The cost to the consumer for getting an X-point improvement in their FinScore.
Banks and credit unions will brag that their customers/members averaged a 25-point improvement in their FinScore over the past 12 months, and that their competitors’ customers/members didn’t do as well.
Competing on performance is the future of retail banking — but the industry needs a FinScore to make it happen.