Competition Is Not a Race to the Bottom
In the morning news reports that we receive in our inboxes every day, I’m starting to see a phrase with troubling frequency: “a race to the bottom.”
The context is our ongoing, 11-year effort to compete with FICO for acceptance by Fannie Mae and Freddie Mac, whose reliance on outdated versions of FICO constitute a government-sanctioned monopoly.
Apparently there are individuals with concerns that if FICO and VantageScore were to compete, we would end up loosening standards in order to capture market share.
Here are the reasons why this doesn’t pass the smell test:
- In every market except for the mortgage industry, VantageScore and FICO have been competing for the past 11 years and we both have introduced our most predictive models ever with VantageScore 4.0 and FICO 9. We are clearly only making each other better, more innovative AND more consumer-friendly.
- Lenders, ratings agencies, etc., do not blindly adopt new models. They don’t just take our performance claims for granted. They perform their own, independent validations to test new models in their own environment. If a model doesn’t outperform other options in their testing, they won’t use it. It’s as simple as that.
- Not only do lenders test credit scoring models extensively, but banking and credit union regulators also scrutinize lenders’ testing of credit scoring models in the regulators’ safety and soundness examinations. In addition, as both regulator and conservator of Fannie Mae and Freddie Mac, the Federal Housing Finance Agency is in a position to oversee the GSEs’ credit score model validation and approval process.
- We validate our own models and publicly post the results on our website for all to see. The validations are proof-positive that the models are and remain predictive across the distribution and for all subpopulations. The validations transparently demonstrate that we have not loosened standards in order to score more consumers.
- We have not weakened our scoring criteria and we have no reason to believe FICO has weakened its minimum scoring criteria in the face of stiff competition from our models.
Dating back to 2006, the three uncompromising goals of VantageScore have been to be more predictive and more consistent and to score more people. In this newsletter, you can see for yourself the timeline of how VantageScore’s path to innovation started and has continued to support these goals over the last 11 years with innovative, new features such as the use of trended credit data and machine learning.
We wouldn’t have a single lender using our models if they weren’t highly predictive. We now have over 2,400 lenders and other users of credit scores using our models, including 20 of the top 25 financial institutions. This list is only growing.
These are the cold hard facts. With all due respect, arguments about a hypothetical future in which VantageScore and FICO sacrifice the integrity of their respective models lack an understanding about how we compete and how credit score models are used and regulated.
I understand that there are complexities and challenges that the GSEs face in order to facilitate competition, but “a race to the bottom” is not and should not be one of them.