South Korea Eyes Alternative Credit Scoring to Aid Financially Excluded Amid Rising Interest Rates

As South Korea braces for a potential resurgence of high-interest rate periods, individuals with low-to-middle credit scores and those lacking extensive financial histories face increasingly harsh conditions. Many are forced to pay exorbitant interest rates or are shut out of the formal financial sector altogether.

“

Traditional credit scoring models primarily look at whether you have borrowed money from first-tier financial institutions and how well you have repaid it.

In response, financial authorities are pushing for greater financial inclusion through the adoption of 'alternative credit scoring models.' These models go beyond traditional metrics, which primarily rely on a person's history of borrowing and repaying from first-tier financial institutions. Instead, they incorporate a wide range of non-financial data.

This alternative data includes consistent payment records for utilities and small purchases, shopping history, and stable savings or investment cash flows. The goal is to uncover the 'hidden credit scores' of individuals, particularly small business owners, young adults, homemakers, and recent graduates, often referred to as 'thin filers', who have limited credit histories. By leveraging this data, financial institutions can offer lower interest rates and improve access to credit for these vulnerable groups.

“

Alternative credit scoring, on the other hand, discovers and utilizes various non-financial data such as consistent payment of utility bills and small purchases, shopping information, and stable savings and investment cash flows.

However, challenges remain in fully implementing these alternative models. While credit bureaus like Korea Credit Bureau (KCB) are working to incorporate non-financial and MyData information, its weighting in credit scoring is still minimal. KCB notes that while they strive to assess creditworthiness and repayment behavior using this data, limitations persist, highlighting the need to discover and utilize more diverse non-financial information. Currently, the data includes income information from the National Tax Service, financial assets, and payment records for utilities and insurance premiums.

“

The goal is to discover the 'hidden credit scores' of individuals, particularly small business owners, young adults, homemakers, and young people with insufficient financial history, and to help them lower their loan interest rates and access institutional finance.

Efforts are underway to develop more sophisticated models, such as the 'Small Business Specialized Credit Scoring Model' being developed by the Korea Credit Information Service (KCIS). This model aims to use artificial intelligence to analyze non-financial and qualitative data, including business performance and market trends, to provide a more comprehensive assessment. A pilot program is expected to launch in the latter half of the year, potentially benefiting around 700,000 small business owners with new loans and interest rate reductions.

“

There are still limitations, and there is a need to discover new non-financial information.