TITLE:
Profitability vs. Credit Score Models—A New Approach to Short Term Credit in the UK
AUTHORS:
Marko Sjoblom, Alessio Castello, Gregory Gadzinski
KEYWORDS:
Financial Innovation, Profitability Model, Overdraft, Credit Scores
JOURNAL NAME:
Theoretical Economics Letters,
Vol.9 No.4,
April
30,
2019
ABSTRACT: The profitability lending model was initially discussed
by Eisenbeis [1] who suggested that it might be possible to build a lending
model that prevailed the traditional scorecard models. In this paper, we study
a unique dataset from a personal loan company based in the United Kingdom,
which offered overdraft-style short-term loans to individuals with low and high
credit scores during the last few years. Our results conclude that credit score
does not significantly impact profitability in the overdraft market. Moreover,
we argue that, assuming a good understanding of low credit
score individuals, a business model that grants
loans to these “new” customers is as sustainable and commercially viable as lending
to higher credit profile applicants.