Why we invested in Aire, the company reinventing credit scoring
Today is a major day for Aire, the London-based next generation credit scoring startup. The company has announced that it is now authorised and regulated in the UK by the FCA as a provider of credit references. This is significant. Aire is the first new entrant in an industry that has been led by the same ‘big three’ credit bureaus for close to a century.
We wanted to use this opportunity to announce the investment we made in the company back in the spring, and share a few words on why we decided to back Aneesh and his team on their journey.
A large industry ripe for disruption
Credit scoring is a core foundation of financial inclusion in our modern societies. Whether you’re applying for a mortgage, to lease a car, for a credit card, a consumer loan or a phone contract, the ultimate YES/NO decision is always based on a credit score. It’s no surprise that very large companies have been built in credit scoring. From credit bureaus collecting personal data like Experian ($18BN), Equifax ($14BN) or TransUnion ($5BN), to companies building credit scoring algorithms like FICO ($3.5BN).
The story behind those companies is fascinating and I highly recommend reading it. In 1956 FICO was essentially a startup, one of the very first companies to understand that computer models were better at performing certain tasks than human experts, in this case assessing credit worthiness. One hundred years ago, the credit bureaus were some of the very first “data businesses”. They built defensibility through scale and regulation. What I find very interesting is that this industry that was at the forefront of technology 60 years ago has virtually not changed ever since. In a nutshell: traditional credit scoring models are backward looking. They infer consumers’ ability and willingness to repay their future debts from their financial history.
Why is that a problem?
Traditional models are great at scoring people with a lot of historical data, but practically incapable of scoring those of us missing some of those data points. Most people with “thin files” like migrants, students, or freelancers get automatically declined not because they are not credit worthy, but because they don’t have enough historical data. This is by no means a small problem. We are talking about approximately 30% of all applicants for consumer loans in the UK, and an estimated 50m people in the US. Those numbers are also growing fast as international mobility increases and non traditional forms of employment become more common.
Who is that a problem for?
Consumers in those categories that are denied so many basic financial products because the industry is incapable of assessing them. This is a great example of a catch-22 situation: no data = no credit = no data… Having lived in 7 countries and tried to get access to financial products in 6 of them, this is a problem that I’ve experienced the hard way.
It’s also a major problem for financial institutions that are missing large revenue opportunities. They spend marketing dollars to acquire customers that they cannot monetise. Not because they are bad customers, but because credit scoring is still done the same antiquated way!
This is the initial pain that Aire is solving: accurately scoring consumers that would otherwise be rejected by traditional methods. Aneesh’s broader vision for the company is incredibly ambitious, and we believe that his team has all it takes to execute it.
A great illustration of our investment thesis in machine learning
Aire is a perfect example of the type of machine learning startups we have been looking for: vertically focused companies, having direct access to a proprietary dataset, addressing a high-value problem by using machine intelligence to extend the shortfalls of human experts. And hopefully getting paid for doing that! Other good examples of similar companies we backed include Blackwood Seven or Sourced. If you are building such a company, I’d love to have a chat.
Aire is also a good illustration of our growing interest in companies operating in regulated spaces. We have increasingly been willing to take this type of risk in finance or healthcare, where we see regulation as a great competitive moat. Tink and Natural Cycles are other good examples of that.
We invested in Aire alongside our friends at White Star Capital, as well as Washington, D.C. based Accion Venture Lab. We’re delighted to be backing this team — a warm welcome to the Sunstone family!
