Credit Scoring in Poland

Kredyt Karma is a Fintech start-up that will be based in Poland. Its core activity will be to develop methods to increase the purchasing power of consumers through strengthening their credit score. Kredyt Karma will offer services by consolidating and development of assessment tools and standards and systems that will be availed to consumers during their online search for available credit options. A report is a mapping tool of the existing processes and legislation in EU. It analyses the competitive forces in the industry through the use of tools such as PESTEL, SWOT, VRIO (Agarwal, Grassl, and Pahl, 2012). The analysis is vital towards the success of the company as it will help in providing the relevant information needed to operate in the country and the feasibility of the new market.

The main problem of any lender is to differentiate between “bad” and “good” debtors before granting credit, and such differentiation is possible through the use of a credit-scoring method. Credit scoring in its computerized form is the only way to evaluate creditworthiness since financial institutions have inadequate resources to treat each small exposure individually. The methods generally utilized for credit scoring especially in the EU countries are traditional techniques and based on statistical patterns (Albanesi, De Giorgi, and Nosal, 2017). These conventional methods often defy the view that credit regards as being beneficial and straightforward data-mining process. As a consequence, this desk research anticipates that the start-up of Kredyt Karma will combine three methods established by the different industries. The present paper will review the most frequently employed credit scoring methods used by lenders in the UK and other EU countries, and the author will discuss weaknesses or problems associated with implementing a single approach as well. In other words, a significant concept relevant to credit scoring in Poland is that of the issues related to the use of an only scoring method.

Moreover, the goal of the present research is to assess and evaluate the way consumers credit strength, can benefit and take ownership of their credit score and to be able to improve their credit strength in a non-standardised market of EU countries. EU countries, including Poland, have no company tracking the credit score of people over the European Union and making it available for all business throughout the union (Watson, 2013). When one move to another nation, the individual has typically to start with a blank slate, credit-wise. Other countries utilize different methods or systems of credit scoring, due to differing regulations and legislation from nation to the nation regarding information usage and credit reporting (Giudici and Misheva, 2018). EU countries, including Poland, have different financial and cultural approach to debt where it is common among various nations to rent property permanently avoid amassing debt or taking out a mortgage. Criteria for lending also tend to be more inflexible (European Union, 2018). In Europe, credit scoring varies by nation although generally each application of loan is reviewed based on an individual’s current salary, current debts, family situation, residence status, and other social factors. While methods of credit scores vary from one country to the other, there is a still a centralised European record for the creditors who make late deposits. For instance, if one fails to make timely loan payments, the lender puts the creditor in a special file that is shared with all lenders across most of Europe. In the United Kingdom, there are three credit agencies (Callcredit, Equifax, and Experian), and lenders or financial institutions take into account court records, residence details, personal information, and if the borrower appears in the electoral roll, as criteria to determine creditworthiness (Marquez, 2008). This implies that those immigrating to the United Kingdom and other EU countries will not get an automatic benefit from their domestic credit score.

Since Equifax, Experian, and Transunion dominate the credit bureau sector as credit reporting agencies, the present thesis will also evaluate their strengths and weakness as well as the flaws of the credit method score used. The three players offer information services that enable businesses to make sound decisions about managing portfolio risk and extending credit. One of the weaknesses is the three credit agencies compete with each other since they have a similar product mix that is the same targeted customer base (Verner and Gyöngyösi, 2017). The other weaknesses are that all the agencies offer identical analytical models, FICO score, which is used in credit analysis. It is not easy to translate FICO into just any language. FICO as a traditional method of deciding whether to grant an individual credit, it uses the human judgement of the risk of default, based on the experience of previous decision (Marquez, 2008).

Furthermore, FICO credit scoring is adjusted depending on the credit bureau available in each country. Meanwhile, TransUnion states that it will attempt to re-apply credit scoring methods across nations that share similarities. The other limitation of the FICO credit score is it uses any feature of a consumer in spite of a clear link with a likely repayment cab be justified, and also sometimes it includes economic factors (Fair Isaac Corporation, 2018). Also, use of FICO score in Equifax, Experian, and Transunion, sometimes consumers might have the features, which make them more similar to bad than good payers, although may have these entirely by chance (Marquez, 2008). Another criticism of the FICO score is the possibility of indirect discrimination, since it is non-standardized and differ from one country to the other or from one market to another and sometimes might reject creditworthy customer since he or she changes job or address (Fair Isaac Corporation, 2018).

Due to the weaknesses of the dominating credit bureau agency in the EU countries, Kredyt Karma is expected to diversify operations, while trying to fill the market gap left by the FICO score in the lending industry; which is possible through consolidation of various credit score methods. Kredyt Karma will also continue to develop partnerships with financial institutions and other lenders in an attempt to target individual borrows. Kredyt Karma is unique since it is the first agency that focuses on credit score with a combination of 3 methods established by the different industries. Kredyt Karma will use FICO and social score together and have the services with a focus on the consumer owning their score, instead of that it is the Banks and credit institutes that have ownership of their scores (Marquez, 2008).

To meet the primary objectives of this research the rest of the paper will cover the following: the methodology section will discuss the techniques utilized in the present study to collect data. Individually, will present both qualitative and quantitative methods, sampling techniques, and tools used to gather data from Polish citizens both in Poland and abroad. The third part will cover analysis consumer and the market environment through the use of relevant models and techniques such as PESTLE, SWOT, and VRIO. The next section will present a recommendation that has been derived from the introduction, analysis and methodology part. Finally, the last chapter will depict the conclusion of the entire paper.

2.0 METHODOLOGY

The research utilised qualitative and quantitative research methods for the collection of data that will provide critical insight into the feasibility of the market for Kredyt Karma. The research utilized both quantitative and qualitative approaches since some of the variables could be quantified while others could not as they were responses and varied across the respondents (Onwuegbuzie and Leech, 2005). The survey was conducted online through the use of mobile web pages and computers. The method of online survey was essential as it saved on cost, time and allowed for a broader pool of participants especially Polish citizen who live abroad (Wright, 2005). The online survey also reduced the number of unreturned questionnaires.

The online survey also helped identify inconsistencies and helped indicate the time that the respondents took to complete the entire study. The questionnaires of respondents who took an extremely short period (less than 45 seconds) to complete the questionnaire were discarded as the survey had estimated the approximate time needed to complete the entire survey which was expected at seven and a half seconds for each question with the whole survey taking around one minute to complete. The questionnaire had eight straightforward questions that were simplified to allow for ease of comprehension. The time to complete the study was designed to be short because the anticipated length of answering online questionnaire is negatively associated with a respondent’s initial willingness to participate in the survey (Fan and Yan, 2010). The questions in the study were also well crafted and included both open-end and closed-end questions as well as one Likert-scale question (on a scale of 1-10). The questions were crafted in a manner that ensured they required a shorter response time with the open-ended questions needing quick responses. The questionnaire was designed to ensure that respondents complete it and that the answers to the last questions are an accurate reflection of the respondents’ thoughts because respondents tend to be faster when answering the previous items (Galesic and Bosnjak, 2009). Therefore, the online survey provided for various checks and balances that helped promote the accuracy of the findings.

The sampling technique used for the survey was stratified random sampling. The stratification process was vital because it allowed for the participants of the study to be Polish citizens (Bryman and Bell, 2015). The fourth question on the online survey helped established the nationality of the participants. The open-end questions were also answered in Polish, and the study explicitly stated that it was for Polish citizens at the start page. The sampling technique was suitable because it helped eliminate any form of bias and, therefore, the sample population was drawn from a vast pool of people with different demographic characteristics. The survey considered demographic factors such as education, gender, and age. The web-survey attracted a sample size of 59 Polish citizens living in Poland as well as across Europe. The data collected was entered into Microsoft excel data sheet for analysis. The software was selected because it is easy to use and offers many tools for data analysis.

3.0 ANALYSIS CONSUMER AND MARKET ENVIRONMENT

3.1 Data Analysis AND RESULTS

The present research involved 59 participants in the data collection process. As shown in figure I below out of the 59 respondents, 28 were male while 32 were female. The number of participants who took part can be interpreted that in Poland women are more sensitive about matters of credit scores than men, hence demonstrating femininity than masculinity.

Figure 1: GENDER (Galesic and Bosnjak, 2009)

Figure 2: Age group

The survey also classified the research participants in age groups, ranging from 18 to 60 years. As depicted in figure 2 above, 18 to 30 years had 18 participants, 31 to 40 years were 31 respondents, and 41 to 60 years were eight interviewees, and lastly 60 and above were two respondents. The results demonstrate that Polish citizens who are between 31-40 years are more interested in credit scores than any other group in the country.

Moreover, as demonstrated in figure 3 below, the data analysis process identified that only 27 out of the 59 respondents interviewed have applied for a loan in the last three years. The findings may indicate a small uptake of loan services. However, the results from the research do not represent various forms of lending such as credit cards, peer lending as well as the purchase of goods on vendor’s provided credit.

Figure 3: Loan application for the last 3 years (Galesic and Bosnjak, 2009)

The survey also covered on the Polish citizens’ awareness of financial score, as depicted in figure 4, the results show that most participants (54 out of 59) had heard of such methods before. Such results helps Kredyt Karma to develop strategies of penetrating in Polish lending market.

Figure 4: Awareness of Financial Score (Galesic and Bosnjak, 2009)

As shown in figure 5 below, out of the 59 participants, only eleven have received a financial score in the last 12 months seven do not know whether they have received a Financial rating within the period, nine have not received it while 32 of the respondents did not answer the question. The number of respondents who have earned their financial score within the last 12 months represents approximately 19% of the sample population. The percentage is significantly low an indication that the access to an individual’s financial score is not limited. The effects of this are that consumers are unaware of their credit strength and may miss out on certain credits because of their score.

Figure 5: Received financial score in last 12 months (Galesic and Bosnjak, 2009).

The knowledge of their financial score is also key to helping consumers to boost their credit strength. As demonstrated in figure 6, despite the lack of understanding of their credit score, a significant percentage, approximately 73% of the sample size (43 out of 59 respondents) are knowledgeable about what impacts their financial rating. However, the reasons they each list as factors impacting their scores vary. The four critical reasons listed by the respondents include income, employment, age and the installments of the loans. A majority of the respondents believed that a stable source of income helps improves the credit score of an individual because they can service their debts with ease. For some, the steady source of income meant having a stable job while others cited it as earnings. The respondents also believed that the installments of loans which is also related to the loan amount were a significant determinant of the credit strength. While the respondents did not provide more details on how they relate these factors to credit score, it was clear that a majority associate good credit score with the ability to repay current loan obligations on a consistent basis.

Figure 6: Awareness of impacts of personal financial score (Galesic and Bosnjak, 2009).

Additionally, majority of the respondents seemed to be very cautious about the information that they give out to credit companies. As in figure 7, out of 59 interviewees, 42 participants were not willing to share more information to set better loan conditions. For some, this is the determinant on whether they take credit or not. A significant number of the respondents cited that they draw the line when it comes to the divulging of personal information. However, they did not mention which information it is that they consider as private which possess a challenge in identifying this type of information. The kind of information that a majority of the respondents were stating is the relevant information needed for improving credit score. Some cited income, credit history, expenses, mobile phone number and private life as the data they were unwilling to share. The finding is an indication that consumers are unaware of the type of information that is relevant towards ensuring that they strengthen their credit score. The result may also be that the consumers are afraid of any breaches of privacy and, therefore, are reluctant to share any private information for fear that it might fall into the wrong hands. The findings of the survey are a clear indication of the market niche in the credit scoring industry as a majority of the respondents do not seem to know their financial score. It is evident that the information available to the consumers is fragmented, and they lack the full knowledge of how credit scoring works or ways that they can improve their credit rating. For a majority, the improvement of credit score entails only the full service of a loan without defaulting and do not fathom that a new loan can be used to improve the credit score as well other strategies.

Figure 7: Sharing more information to set better loan conditions.

3.2 The Macro Environment

3.2.1 PESTLE Analysis

This section offers an overview of macro environmental factors that are likely to impact operations of Kredyt Karma, as a startup agency in Poland. Most of these political factors are aspects that Kredyt Karma will have no control over, but the implications which need to be understood. In regards to political considerations, Poland offers a conducive business environment that is free from political instabilities that might have a negative impact on business operation (Collinson, Narula, and Rugman, 2017). The Polish government has robust ties with EU countries, including France, Slovakia, Great Britain, Germany, Hungary, Czech, and Lithuania, which will be friendly for Kredyt Karma.

Economic factors have a significant on how Kredyt Karma will do business and profitability. Various aspects such as the growth rate, interest rate, disposable income of consumers and inflation among others affect the economy of the UK and EU countries. For instance, in 2009, was the only EU country that escaped recession, depicting the growth of 1.60% owing to its strong domestic demand and robust economic policies. A flexible currency and a healthy banking sector also supported the growth of Poland’s economy, as other EU economies witnessed severe contractions due to the global economic crisis (Giudici and Misheva, 2018). Moreover, in Poland, the rates of interests are minimal. Generally, the rates of interest affect the rate at which credits are issued. Higher rates of interest adversely affect the level of debt issuance and borrowing hence leading in lower income for credit bureaus. For instance, the average rates for loans are -6.5% and deposit rates in the domestic currency is 2.7% (Siroya, 2016). Due to low interest rates, it means in Poland that the number of businesses and consumers taking loans increases, hence more need for improved or advanced credit scoring methods which is the motive of starting up Kredyt Karma Agency in Poland (Lauer, 2017). Additionally, in Poland, there are 642 credit institutions and banks, and they have been quite stable for the last few years in comparison to other European countries (Verner, Sufi, and Mian, 2017). Therefore, Kredyt Karma has no risk of “too big to fail” scenario in Poland.

In regards to social parameters, Poland has performed well, however, similar to most EU countries Poland witness demographic challenges due to an aging society and declining rate of birth. A high number of old individuals in the country, it implies the borrowing reduces as they are few people looking for funds for business or mortgage (Mian, Sufi, and Verner, 2017). Customers in Poland have comparatively few loans. In 2009, Polish consumers credits to loans to Gross Domestic Product was almost 30%. Generally, this borrowing ratio is small in Poland, regardless of the current increase in new loans, and anticipated to continue in the long-term.

Nonetheless, household and residential credit have slightly decreased recently to household’s disposable income, which might have been due to traditional scoring methods, which had set the limit on creditor’s debt to income ratio (Thomas, Crook, and Edelman, 2017). Instead, Kredyt Karma will use multiple credit scoring sources, where it will consider various factors to ensure Polish consumers credit strength benefit in the lending process. For instance, creditworthiness for a Polish citizen in a foreign country will be estimated as the credit would be in Poland. However, the Kredyt Karma should tackle the demographic variations via new social reforms; otherwise, in the long run, it is likely to experience pressure in the labor market and public finances.

Concerning the technological factors, Poland is developing as a primary business process outsourcing centre, although low expenditure on R&D could hamper innovation of Kredyt Karma’s credit score methods. As per the Innovation Union, in 2009, Poland’s total expenditure on Research and development was approximately 0.68% of GDP, and nearly one-third of the EU average of 2.01% in the same year (Giudici and Misheva, 2018). Thus, Kredyt Karma needs to massively invest in Research and Development to gain a competitive advantage over other agencies in Poland. Furthermore, the credit scoring industry has been evolving over the years with the modern sector making use of Big Data to collect the relevant information needed (Einav and Levin, 2014). However, as technology advances, there are threats to the privacy of information and the issue of consent. Kredyt Karma, therefore, has to ensure that they use technology that helps protect the information of their clients from any breaches that might lead to the information falling into the wrong hands. However, as most of the Polish consumers use electronic products of credit, it is worth to note that Polish banking segment is one of the safest and innovative safe ones in Europe (Nikolaidis, Doumpos, and Zopounidis, 2017). Nonetheless, electronic banking penetration is smaller than in UK, France, Finland, Netherlands, and Sweden, although is higher than the EU average and several other EU countries, such as Italy, Germany, Norway, Austria, and Denmark (Guiso, Sapienza, and Zingales, 2013).

In regards to Legal factors, Poland has a comprehensive legal structure, although its weak environment of business is still a challenge. Kredyt Karma needs to know what is legally right and wrong to avoid legal litigations that might affect a company’s operation and profitability. Finally, Kredyt Karma will consider environmental factors before its startup. Poland has a flexible environmental policy framework in place (Wright, 2005). The nation has revised its ecological law to ensure that environmental development and protection co-occur. However, Poland has scored poorly in regards to its business environment. According to the World Banks report in 2013, a startup business in Poland needs six procedures and 32 days, compared to the OECD average of 12 days and five systems (Lowary, 2018). Thus, in this case, Kredyt Karma need to be registered earlier to avoid delay in its method score operations. Although the credit scoring industry does not deal with tangible products, it can play a crucial role in promoting a friendly environment through indirect ways. The industry can make a point of reducing the use of paper by digitalisation of filing systems to avoid having to keep paper records (Nosal, 2017). Along with saving on paper, the Kredyt Karma can make use of energy-efficient technologies and also apply the use of renewable sources of energy such as solar in the offices.

3.2.2 Cultural Differences

According to Hofstede Insights (2018), Polish culture is characterised by power distance, individualism, masculinity, uncertainty avoidance, long-term orientation, and indulgence. Power distance Poland is very high and is considered a hierarchical society, which implies to accept a hierarchical order where every individual has a place that needs no further justification. This will support the survival of Kredyt Karma and will enrich Polish citizens with positive perception about a social score. The Polish citizens are likely going to respect the combined credit scores Kredyt Karma develops. In this case, polish citizens will have little power to decide the process of credit score but will adhere to the improved methods.

Poland is also an individualist society, where a loosely-knit social framework is highly preferred, and people are expected to take care of themselves and families (Hofstede Insights, 2018). Thus, Kredy Karma needs to show every Polish citizen is essential in the hierarchy regardless of the placement in it, since family background determines an individual’s standing in the society. Hofstede Insights (2018) also exhibits Poland as a masculine society. This will aid Kredyt Karma to be assertive and decisive in regards to the credit score of polish citizens, which they will be expected to respect.

Additionally, Poland has a very high preference for uncertainty avoidance. Polish citizens attempt to prepare for the worst, which is further proved by their interest to have rules and get written contracts (Hofstede, 1986). This might negatively affect operations of Kredyt Karma since until proven the combination FICO and social score might be perceived as too risky and thus rejected in Poland. Moreover, Poland has the low long-term orientation which implies that the society is more normative than pragmatic. Since according to Hofstede Insights (2018) Poles does not save much for the future and have a preference for quick results, this will favor Kredy Karma since the more people spend, the more they are likely to get loans hence increasing the profits of the agency.

3.2.3 SWOT Analysis

The section will analyse the strengths, weaknesses, opportunities, and threats for a Kredyt Karma credit agency or business, considering what BIK/BIG is offering to the market regarding their credit score of “631.” BIK/BIG refers “631” as weak or bad credit score, which is likely to be the stronghold of Kredyt Karma when penetrating the market since the score will be viewed as fair or reasonable in the consolidated methodology. One of the strengths Kredyt Karma acquires over BIK or BIG is a competitive advantage since it seeks to introduce a durable information medium via combining both FICO model and Social score. BIK/BIG using FICO methodology score alone disadvantages it in the lending market since it does not consider social parameters which are significant in creditor’s repayment ability. Furthermore, BIK fails to provide consumers with access to their credit score. Thus, Kredyt Karma using combined credit scores will change the paradigm in the lending and financial world, as consumers can command integrity and visibility of their credit scores, loan and bank documents. With Kredyt Karma, consumers will be able to see factors used to compute their credit score, giving consumers the capability to provide and challenge counter terms if needed (Dyson, 2004). The other strength is that with new consolidated score methodology, Kredyt Karma can generate highly predictable revenue streams from their operations since it targets the large number Polish citizens who are dissatisfied with the FICO credit scores offered in BIK/BIG.

Kredyt Karma will also experience some weaknesses in the lending market since in Poland the credit agencies are facing change in regulations after years of having very few rules to their operation (Porter, 1979). This trend is anticipated to go on in perpetuity since people highly value their credit profiles and scores. Thus, Kredyt Karma will experience the possibility of obsoleteness of its credit score methodology after some years of operation due to legislation and regulation changes. The other weakness of Kredyt Karma is that there is stiff competition in the market (Dima, 2009). Any firm can register as a credit agency in Poland, as such, there is competition to introduce quality credit score methods. Finally, Kredyt Karma is a startup firm, and it is not yet known in Poland, which gives BIK some advantage. BIK tracks more than 140 credit histories of over twenty-four million people and one million businesses in Poland.

Additionally, Kredyt Karma has the opportunity to introduce a standardised and advanced credit score method in Poland which will be constant in all countries (Porter, 1985). This implies that when a consumer travels to other nations, he or she can benefit from the lending process since he or she does not have to start from a blank slate, credit-wise. In this case, a non-standardised score is criticised as the inclusion of factors in the computing of credit scores differ and, therefore, the credit scores lack comparability aspect. Moreover, Kredyt Karma has the opportunity for the utilisation of financial technology as well as the consolidation and development of analytics tools (Porter, 1990).

Finally, Kredyt Karma threats are a change of regulations. As shown in the weaknesses part, the regulations facing credit agencies in Poland is anticipated to grow significantly over the next five years. GDPR will continue overseeing the operations of these businesses, and new rules are likely to be adopted on credit score methods (Choo, 2011). Although these threats Kredyt Karma is expected to face, in the long-run they may end up benefiting the lending markets as standardization of credit scores occurs (Porter, 1966).

3.2.3 VRIO analysis

In this case, value analyses the capability of the Kredyt Karma to exploit a market niche or help towards the mitigation of a credit score problem. The lack of standardised credit score in Poland provides a niche market for credit score repair companies because many people are not well conversant with their credit score (Cuervo-Cazurra and Narula, 2015). Kredyt Karma also seeks to mitigate against the risks of default by consumers by ensuring that they meet their credit obligations to attain a good score. Therefore, it achieved the requirements needed to qualify it as a strength.

In Poland and EU countries as a whole, a combination of FICO score method and the social score is scarce since no credit agency uses such methodology (Hesterly and Barney, 2008). Thus, Kredyt Karma is unique, since it is the first agency that focuses on credit score with a combination of 3 methods established by the different industries. This scoring methodology will fill the gap in Poland’s lending process. Kredyt Karma will use technology and the quality of service as a source for creating a rarity of the consolidated credit methods in the market (Bartlett & Bartlett, 1986). Kredyt Karma will ensure the new methodology will adhere to GDPR regulations of data protection for its survival in the lending industry.

Kredyt Karma also has a more significant competitive advantage since the new consolidated credit score method will be hard to be imitated by the existing agencies, such as BIK since it is expensive and complicated (Knott, 2015). To emulate, other agencies in Poland will need to employ new experts who are conversant with the scoring methodology, and to some extent will require benchmarking from Kredyt Karma. Thus, due to the high cost of imitation Kredyt Karma is likely to enjoy the competitive edge in Poland’s lending industry. Furthermore, the combined score methodology is a new algorithm that is difficult to program or expensive to buy (Nobel price, 1994). Finally, Kredyt Karma will adopt a form that will support the combined score methodology, and employ experts in credit score. Additionally, Kredyt Karma will introduce policies and culture that help to capture the value of combining FICO and Social score (Bartlett & Bartlett, 1986).

4.0 RECOMMENDATIONS

A critical analysis of the market feasibility of Poland and the credit score methods has resulted in several recommendations that when utilised have the potential of making Kredyt Karma successful in the market. A key proposal is the creation of consumer awareness of the value of the consolidated credit scores, their responsibility and success rates in standardised markets such as EU countries to manage consumer expectation. Based on the research findings, a majority of consumers in Poland are not well aware of credit scoring and what it entails. While a majority indicate partial knowledge on the same, the level of expertise impedes the adoption of credit score repair services. Therefore, it is crucial for the business to educate its market on the importance of credit score. Raising awareness includes giving educational sessions which may be done through online platforms or in trade fairs. The online platforms can use video tutorials while the organisation can also pass out brochures with the necessary information (Malhotra, Malhotra, and See, 2013). The company’s website should also dedicate a web page that will help in educating the visitors on the advantages of having a combined credit score. In these platforms, the company needs to inform the public about the use of financial information in the analysis of credit score and ways to repair it if the score is