I follow developments in digital commerce, of course, many of which involve Digital Commerce Alliance members. I saw some data recently about innovation diffusion – which made me think about record stores. Well – CD stores, anyway.
CD sales peaked in 2000 – record labels sold almost a billion of the shiny little things that year. After that, MP3s came along and slowly displaced the old CDs – but some consumers adopted the new technology much faster than others. In 2006, just 20% of Americans owned an MP3 player . . . but 54% of teens owned one.
Why did older consumers lag in adopting MP3s? Older consumers have more money – they can better afford to buy the better technology. Why not make the switch?
Let’s put a sticky tab on that question.
Here’s the connection to credit scoring: like teens with the digital music revolution of the aughts, in the evolution of financial inclusion, fintechs are leading the adoption of the VantageScore credit scoring model.
The Rapid Rise of Digital Music and VantageScore Credit Score Usage
As most everyone knows, FICO is the oldest credit scoring model – it’s the CD. Then came VantageScore with the idea of providing credit innovation and choice. It’s the MP3 player.
A recent report on credit score usage shows the rate at which different kinds of companies are adopting the VantageScore credit scoring model. Overall, VantageScore credit score usage saw 30% growth, with its most notable uptake in the fintech industry. The breakdown by industry segment is where things get interesting. Among traditional financial institutions – banks, auto lenders, card issuers, credit unions, mortgage originators, and government entities – VantageScore usage grew by 20%. However, in the fintech category, usage blew up: VantageScore use increased from 1.5 billion to 3.5 billion credit scores – a staggering 132% in a single year.
Why Fintech’s Adoption of VantageScore Surged
Why the explosion? Fintechs, including neo-banks and new specialty lenders, are creating a raft of new financial tools for consumers. Credit scores are a key input for their businesses, so there’s growth to be captured. But still – why did VantageScore get so much of it?
I think it’s a systems thing: old-school players want to use VantageScore – they are showing 20%+ YOY growth, after all – but their legacy systems have FICO baked in. By contrast, fintechs don’t have legacy systems, so they can do whatever they want. Their VantageScore adoption is through the roof.
Legacy Systems and Adoption Rate Disparity
Returning to my question about why teens led the charge on digital music sales in the mid-2000s. By 2006 it was obvious that it would be better to just buy music on iTunes – but how was I going to put that into the CD player in my 2006 Chrysler Pacifica? The kids demanded their Veggie Tunes and by goodness they were going to get them. In this way, legacy systems delayed full-blown CD adoption for adult consumers – but teens didn’t have legacy systems. They could do whatever they wanted – and what they wanted was something better than CDs.
I think this is what’s going on with credit scores. Banks, credit card issuers, auto lenders and the like all built their systems around the FICO model because it was the only thing. Now they’re adopting VantageScore, but those legacy systems are forcing a more measured pace of adoption. In contrast, fintechs, unburdened by legacy systems, can freely choose the ‘digital music’ of credit scoring – VantageScore. The adoption rate in that segment is off the charts. Fintechs are like a teenager with her first iPod and Apple headphones. The tune of fintechs is clear – VantageScore is the future, and they’re not looking back.