When there’s no credit history, some lenders use Boston firm’s character tests

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Ross Mytton, an employee of the Entrepreneurial Finance Lab, worked in a conference room at the Harvard Business School iLab.
Ross Mytton, an employee of the Entrepreneurial Finance Lab, worked in a conference room at the Harvard Business School iLab.Josh Reynolds

Businesses use personality tests to screen workers, and dating apps use them to match partners. But can they help banks find worthy borrowers who lack a traditional credit history?

Entrepreneurial Finance Lab (EFL Global), a Boston company that grew out of a Harvard University research initiative, thinks so. The company has utilized its character-based questionnaire — measuring traits such as honesty, optimism, memory, and conscientiousness —to assist banks in approving $1 billion in loans in Africa, Asia, and Latin America for the past five years.

Now it's poised to extend its reach even further.

Last week, the company got a vote of confidence from the grandaddy of traditional credit- scoring firms: California-based Fair Isaac Corp., developer of the FICO score.


FICO agreed to use EFL's personality evaluation in several more countries where consumers and small businesses lack acccess to loans because they have no way of proving their credit worthiness.

EFL's approach is a cross between the children's game Memory and a behavioral test, with 100 online questions that can be answered on a tablet or computer. Borrowers are shown an increasingly longer string of numbers and asked to remember them, an indication that they may have the acumen for business. They are also asked whether they agree or disagree with statements such as "My life is mostly controlled by chance events" or "When things are unpredictable, I usually expect the best" to measure their sense of internal control and optimism.

The company's algorithms show, for instance, that a young borrower with a lot of optimism is more risky than an older one, said Jared Miller, chief executive of EFL. And while dishonest borrowers are obviously unattractive to banks, highly honest ones can pose problems, too, because they may expect everybody to tell the truth.

Based on their answers, borrowers are given a score between 200 and 800. The higher the number, the lower the risk, as with the traditional FICO score.


FICO, which provides credit scores for up to 200 million US consumers, as well as potential borrowers in 20 other countries, evaluates borrower risk by looking at how long accounts have been opened and how much is owed, among other things. It also operates on a simple calculation: If you've paid on time in the past, you're likely to do so in the future.

But FICO's new partnership is an acknowledgment that in some parts of the world that yardstick may be lacking, Miller said. A street vendor in Peru or a family climbing into the middle class in India may not have a long paper trail for a bank to review, Miller said.

"There are markets where the information can be improved," Miller said. "We see ourselves as working with FICO to extend the frontier of lending."

FICO will initially pilot EFL's assessment and algorithms in Russia, Turkey, and Mexico, where lenders will use it primarily to supplement scant credit information, said David Shellenberger, senior director of scores and predictive analytics at FICO. But some lenders may use EFL questions alone if they have no information on a consumer's history of payments and likely risk, he said.

FICO estimates that three billion people worldwide have little or no access to the traditional banking system, leaving them with relatively thin or nonexistent credit files. The company is trying to find ways to score those consumers, partnering with companies such as EFL and Singapore-based Lenddo, which tracks risk based on social media and digital footprints, Shellenberger said.


"I would say that's a large opportunity. It will take time to get there," Shellenberger said. EFL "is providing the means for people who have been shut out of banking to be provided with an onramp."

The company has no plans to use it in the United States, where it has instead tapped into nontraditional data such as cellphone and utility bills to get a better picture of some borrowers.

The Inter-American Development Bank, a government-funded institution that promotes private sector growth in Latin America and the Caribbean through loans and technical advice, encouraged several lenders to pilot EFL's assessment in the region. In a study published last year, the bank found that the personality-driven test can help expand lending, without increasing risk, in situations where there isn't enough traditional credit information, said Irani Arráiz, a senior economist at the development bank and a coauthor of the report.

Ultimately, though, a personality test can't replace a solid credit report, Arráiz said. "Payment history is a really powerful indicator of repayment," she said. "In places where we don't have a credit bureau as well-developed as in the US, this is the second-best solution."

Deirdre Fernandes can be reached at deirdre.fernandes@globe.com. Follow her on Twitter @fernandesglobe.