Silicon Valley State of Mind, a blog by John Weathington, "The Science of Success"
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    Welcome to a Silicon Valley State of Mind, thoughts tips and advice based on the consulting work of John Weathington, "Silicon Valley's Top Information Strategist."

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Silicon Valley State of Mind

Tips, thoughts, and advice based on the consulting work of John Weathington, "The Science of Success."

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Posted by on in Information Exploitation

Banks need an overhaul in their lending practices and I think big data can help. There’s little chance I can get a bank loan right now (not that I need one) even though I’m probably one of the lowest risks in the country. I say that because I emerged from the financial meltdown of 2008 without missing a single payment on anything: loans, credit cards, office rent—even the gardener got paid on time. Compare that to all the FICO superstars that collapsed after two months of no work. Consumer behavior is not easy to model, but if your business relies on it, you better be good at it.

Banks lost a tremendous amount of money because they relied on dubious and ineffective scoring models and now they’re not sure who to lend to. This is bad news for banks—lending money is how they stay in business. I never understood why lending institutions—with all their core competence in analysis—would rely so heavily on FICO scores and lightweight scoring instruments. For instance, I can’t understand how two years of tax returns demonstrates your ability to pay on a 30-year mortgage; however, this still seems to be the gold standard for income verification. And don’t get me started on FICO; I’ve seen my credit score swing 121 points over the last five year period. First, they say I’m a very high risk—then they say I’m a very low risk. All the while, I really haven’t changed a bit.

My advice for banks is to bring their core competence for understanding consumer behavior in-house and reinvent their lending model. Big data and predictive analytics are in a place right now where very sophisticated modeling can be done on consumer behavior. Throw away the arbitrary rules of thumb and forget about FICO—it’s not effective. And even if a new, fancy consumer behavior modeling company opened its doors, why would you outsource something that’s so important to your survival?

Exigent innovation is painful; however, what’s the alternative? The good news for banks is that big data presents an opportunity to pull out of this mess. The question is whether they see it.

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