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Psychometrics in credit originations

August 11, 2020 at 3:32 PM

If 2020 was not hit by the COVID-19 global pandemic, many were touting 2020 as the year of alternative data. In the credit assessment world, data has typically incorporated demographic data and credit bureau data (where available), but now we are seeing alternative data playing more of a role namely in cellular behavioural data and psychometrics.

“Psychometrics refers to a branch of psychology that utilises cognitive tests that measure knowledge, aptitude and personality traits.”

Principa have teamed up with leading industrial psychologists at Astra Constantine (AC) to bring you Risk Profiler© a unique tool for conducting psychometric assessments within a credit application process.

Psychometrics in credit assessments – the challenges

Many lending organisations have dabbled in the use of psychometrics in credit assessments. This has occurred particularly in data-poor environments. Very few are using it extensively. There are many challenges with psychometrics. Some of the challenges include:

  • How does one ask enough questions, without making the application process too lengthy?
  • What category/ies of questions do you look at: intelligence, personality and integrity?
  • What weight does one apply to psychometrics within the application process?
  • How do you ensure that the questions are gender and race neutral?
  • How do you ensure that the questions do not have a language-bias?

“Principa have teamed up with the industrial psychologists at Astra Constantine (AC) to bring you Risk Profiler© a unique tool for conducting psychometric assessments within a credit application process.”

Principa-psychometrics-and-credit-FB-01

Below is an FAQ about the Risk Profiler© tool

Q. How long does the assessment take?

About 5 minutes

Q. What psychometric mechanism is used to determine credit worthiness?

Risk Profiler© uses a situational judgement test (SJT). Essentially this presents a situation to the applicant with several reactions (represented pictorially) and the applicant selects the reaction(s) that they deem most appropriate.

When including forced choice options, it important that all options are equally appropriate. Psychometrics have consistently demonstrated a strong predictor of behavioural choices including voting preferences, scholastic achievement, leadership ability and even dating preferences. However, psychometrics has not been used extensively in determining credit risk. Despite this, psychometrics has shown value in the determination of applicants’ credit risk and we believe it should be adopted more extensively. This is specifically true for low collateral environment where no historic spending or credit data is available.

“Psychometrics have consistently demonstrated a strong predictor of behavioural choices including voting preferences, scholastic achievement, leadership ability and even dating preferences.”

Q. How does the situational judgement test avoid biases?

The pictures used are gender/age/race neutral so to minimise bias. Similarly, compared to verbal psychometric questions, very little text is used. This means that applicants who aren’t particularly fluent in the main language (normally English) are not discriminated against within the test. Each of the pictures are developed to provide the necessary context.

Q. How are the tests taken?

The tests can be taken on a tablet or Smartphone. 75 key metrics about the answering of the question are measured. It is important to note that the test is developed to measure responses on scenarios as well as on screen behaviour. This allows clients to measure variables such as indecisiveness, switching and inconsistency in addition to personality attributes. These are combined in a score that represent the credit-worthiness of the applicant. The combination of information provides a unique profile of a given applicant’s credit risk.

Q. What information is used within the test?

As well as recording what the applicant chooses as a suitable response to a situation, the tool also considers indecisiveness, speed of response and consistency too. The information is combined within a scorecard that represents credit risk.

Q. What sort of credit products are best suited to the Risk Profiler©?

The Risk Profiler© has been deployed for a variety of different credit products. Unsecured credit is where it is used the most as well as short term insurance.

Q. Could the tool be used in the SME space?

For over 50 years the personality profiling of successful entrepreneurs has been conducted. It has shown that there are strong correlations between business success and certain personality traits of the business proprietors. Harvard University’s Entrepreneurial Finance Lab wrote about it at length. The tool is well suited to be used for both consumer loans and SME loans.

Q. What sort of success have your clients experienced?

The Ginis have been relatively high and what has been encouraging has been the model has added lift on top of a demographic scorecard.

Q. Is the test only for credit assessment or can it be used elsewhere?

An SJT can be use in a variety of different situations. We currently offer it as test to be used in employment application to determine who is likely to be a problematic hire and who is likely to be a star-hire. High scoring employment applicants can then be tracked and potentially looked after.

To find out more about how psychometrics could add lift to your application assessment process, get in touch with us at info@principa.co.za .

 

 

 

 

 

 

 

 

 

 

 

 

 

Thomas Maydon
Thomas Maydon
Thomas Maydon is the Head of Credit Solutions at Principa. With over 17 years of experience in the Southern African, West African and Middle Eastern retail credit markets, Tom has primarily been involved in consulting, analytics, credit bureau and predictive modelling services. He has experience in all aspects of the credit life cycle (in multiple industries) including intelligent prospecting, originations, strategy simulation, affordability analysis, behavioural modelling, pricing analysis, collections processes, and provisions (including Basel II) and profitability calculations.

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