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Why behavioral data is critical in assessing consumer credit: An interview with Zaydoon Munir

zaydoon_speaking.jpgThis week we talked to Zaydoon Munir, the founder & CEO of RevolutionCredit, a company that uses behavioral data to help consumers and financial companies interact with each other more effectively.

Munir first thought of the potential of behavioral data during the 2008 financial crisis while he was at Experian. “Everybody was going nuts about how the traditional credit score failed us,” he said. It wasn't until 2011 that he realized he could make the credit scoring process more stable and less discriminatory by adding consumer behavioral data into the equation.

That’s when he founded RevolutionCredit.

To obtain consumer behavioral data, RevolutionCredit offers snippets of financial literacy content right when a consumer needs it. For instance, say that a consumer needs to prove to a lender that they’re better than their credit score may suggest. RevolutionCredit might give the consumer a puzzle that requires them to balance a fictional budget. If the consumer tries to balance the budget by toying with fixed expenses instead of variable expenses, RevolutionCredit will be able to see that the consumer doesn’t understand the basics of budgeting and are therefore less creditworthy.

RevolutionCredit can then "nudge" the consumer to better financial habits.


FinEd 3.0

Munir described this concept of contextual financial education as FinEd 3.0. He said that in the early stages of digital financial education, businesses just slapped printed materials onto their websites. “It was the brochureware of the 90’s — FinEd 1.0,” he said.

Then, as broadband and connectivity increased, educators started to experiment with multimedia. Businesses took all the written stuff and converted it into videos, a situation he called FinEd 2.0.

By contrast, FinEd 3.0 uses APIs to give guidance right when consumers most need it, as described above.

FinEd 3.0 also relies on the principles of behavioral economics.


Behavioral Economics

Behavioral economics is a field of study that looks at all the reasons (emotional, psychological, intellectual) that people make certain economic choices. Put simply, the field acknowledges that consumer financial decisions are often not made for entirely rational reasons.

Because of this fact, Munir believes that the industry must remember that financial education isn’t just about conveying the correct information. “It’s more applied,” he said. “It’s no different than teaching people how to lose weight or exercise. You don’t teach those things by putting people through weeks and weeks of classroom study.”

That’s why Munir came up with the concept of delivering content via an API during a financial transaction. “If you do it just in time, using just enough content, the likelihood that the consumer will actually choose to consume it will increase,” he said. “Let’s be honest, financial education is boring. If the consumer is in the middle of a financial transaction they’re more willing to participate and are likely to retain more, especially if there's an incentive.”

These rewards are a key component of RevolutionCredit.


Better Financial Habits = Win-Win

By using RevolutionCredit, consumers earn rewards when they’ve proven they’ve learned a new financial skill. Munir said he got this idea after once getting pulled over for texting and being told he’d have to go to traffic school. He realized that just as traffic school gives people an incentive to adopt better driving habits, RevolutionCredit could incentivize people to adopt better financial habits.

These incentives are beneficial for several reasons. First, they are designed to make consumers trigger what behavioral economists call the "system 2" mode of thinking by presenting them with an alternate option. Second, they transform the consumer-bank relationship from fee-based to incentive-based. Third, they help consumers improve their financial lives. Most important of all, consumers that complete the RevolutionCredit puzzles either are or become better candidates for a loan.

In short, it’s a way to "nudge" consumers to adopt better financial habits and also a way for lenders to find consumers with better financial habits. In this way the credit scoring process gets an extra element of stability, and consumers and lenders benefit together.


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