When one has a credit history, it is easy to overlook if it’s working as intended, as it is a fairly invisible piece of the fabric of day-to-day financial life. A few moments in an application process, while an algorithm evaluates one's fitness for service by scanning their credit history, is the average interaction a U.S. consumer will have with their credit score.
Yet, for the consumer who is new to the U.S. and planning to stay longer than a brief vacation, their credit history — or complete lack thereof — is more than a friction point, Nova Credit CEO and Co-founder Misha Esipov told Karen Webster in a recent conversation. For many recent transplants to the U.S., it’s nearly a total roadblock to such actions as securing a student loan, getting underwritten for a car loan, renting an apartment or getting any kind of credit card.
It was a problem he stumbled upon during graduate school, when he kept hearing foreign-born classmates tell and retell the same tale of repeated frustrations: having to “duck tape” many solutions together to get everything from a place to live to a cell phone, due to a lack of local credit history.
“What we heard was ‘I had to convince my friend to let me [in] on their family plan’ or ‘I had to convince a friend to co-sign a lease for me,’ or ‘I could only live with roommates who had really good credit history, and I could never go live alone.’ Basically, what we kept hearing was a story about how people felt like second-class citizens,” Esipov told Webster.
It’s a miserable experience, he noted — but, for him, it was also shocking because he thought it shouldn’t have to be this way. If the problem was the lack of credit history that made people essentially invisible because they weren’t local, the solution, he reasoned, was to make it possible to import these people’s previously existing financial lives into their new localities. What consumers needed, and what Nova Credit has spent the last four years building, he said, was basically a “credit passport” that essentially allows them to upload their financial histories to new environments.
There are more than 200 credit rating agencies worldwide that provide a crucial function to Experian, TransUnion and Equifax. Nova Credit looks to partner with those agencies so they can port those scores along with consumers on their world travels — an effort that has, thus far, given the company access to over 1 billion credit records (and growing) from various corners of the globe.
Building A Proper Passport
The global challenge isn’t that internationals are entering the U.S. without any financial history, or that their thin files are a result of their youth. In the case of students studying abroad, for example, they are generally more affluent than average, and have fairly full financial lives before they arrive on U.S. soil. Similar stories lie with international workers, who often come to the U.S. to pursue higher pay. The problem isn’t a thin file, but an invisible file that is extremely difficult to take out from behind the veil.
While there are more than 200 credit rating agencies worldwide, they don't all operate the same way, and aren’t standard enough to easily read across line by line. For instance, credit reporting is meant to offer a full portrait of the potential borrower in systems like America or Canada, versus systems only meant to log negative information, such as Austria or Brazil.
The transition toward a more complete system, where both positive and negative information is reported, is happening broadly on a global basis — both the World Bank and IFC have done well to push that standard. There is also a lot of potential in markets like India, he noted, where there is a credit rating system, but the coverage still fails to reach wide enough accessibility to be useful.
“The potential of Indian credit history is much higher than the actual observed coverage that we are still seeing among Indian consumers,” Esipov said.
The challenge Nova Credit faces is taking in all that data from foreign sources and normalizing it for use in a U.S. financial services context. It takes that raw data from the overseas reporting bureau and transforms it into a customer's credit profile, which is then run through additional in-house analytics and servicing to ensure that it is compliant, as well as “predictive and aligned, with the known standards here in the U.S.” In the end, the consumer gets a standardized passport that a financial institution can use just like a domestically produced credit score to evaluate the potential customer’s creditworthiness.
Connecting The Global Credit Scene
Webster asked if Nova Credit was attempting to build a global credit rating platform. Esipov responded that the simple task of helping the increasingly mobile global population to port their domestic financial histories anywhere they travel and settle is a big enough job that will keep the firm busy for several years.
A nation like India — where only 400 million of 1.2 billion people are currently captured by the domestic credit rating bureaus — will be a major challenge point. It’s an amazing market, Esipov noted, in that only one-third of the tapped population is larger than the entire U.S. market. That will be a major construction project.
However, Nova Credit has made some big partnerships, most recently American Express, which uses the Nova Credit passport on 100 percent of its U.S. customer cards. That alone is a major step up for newcomers, who now have a much better credit option than the ultra-low-limit secured cards that many are forced to start off with to build an American credit history. The goal, he noted, is to keep signing on more partners, and help more banks and issuers plug into the firm's API so they can take a holistic look at global consumers who show up at their doorstep looking for assistance.
At the end of the day, it is a win for all parts of the ecosystem. It is a win for financial institutions, which can now address a market segment that they have been forced to ignore because they couldn’t evaluate it properly. It is a win for the enterprise, which can now flexibly deploy global workforces as it wants, without concerns about the financial standing of workers from foreign soil. Of course, it is a win for consumers, who can now have financial data that is transportable.
“The question we have to keep answering is how do we enable credit capability to be used by all the major financial institutions in the country so they can welcome in a newcomer when they first arrive. We want to create a world where those newcomers are not limited in their selection, where they can access services more freely and more equally, and at more attractive rates, without creating risk for the U.S. system,” he said.