Algorithmic credit scoring: big data protects firms from bad deals

23 January 2023 | 15 Shares

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As economic downturn looms, every decision a company makes needs to be carefully thought out. Especially pressing is a need for certainty when partnering with new businesses in a climate where one party’s losses could mean the other’s downfall. Accurate data provides security for decision-makers, but only if those numbers are readily available. And this is where API connections have transformed access to credit scoring insight.

There are a number of key players in the sector, including Red Flag Alert – the only independently owned UK credit referencing agency for business. The firm, which has its data HQ in Manchester, aims to provide an all-in-one service for managing risk and achieving growth. And supporting this is a machine learning algorithm that uses 15 years of insolvency data to predict the financial health of businesses. AI tools, such as those employed by Red Flag Alert, support clients in making the right calls when growing their businesses. What’s more, credit scoring systems can adapt and reflect changes in the financial landscape.


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Policy impact

The Bank of England’s Monetary Policy Committee (MPC) has increased interest rates to 1.75%. This figure was just 0.1% in Q4 2021. As well as the impact that this will have on businesses staying afloat, increased energy prices in England will see 75,000 companies at risk of insolvency, according to data collected by Red Flag. “Given the climate being not just high interest rates, but people being able to trade through forbearance during covid, you’ve got record levels of trade debt out there,” observes Richard West, Managing Director of Red Flag Alert.

To avoid coupling with a company with bad debt, let alone all-out fraudsters, due diligence is carried out on prospective partners. Historically, checks would go through sources such as Companies House. However, the speed at which some data is updated means that companies could find themselves relying on out-of-date information.

This kind of risk might have been viable in less high-stakes financial eras, but now, after a total of 5,595 company insolvencies in England and Wales in Q3 2022, change is happening too fast to rely on old data.

Added value

In a downward market, people are willing to pay more to ensure safe choices. When risk appetite changes, credit scoring in particular can provide great value to businesses of all different shapes and sizes, including financial institutions and SMEs.

Red Flag Alert’s system is just one example of platforms that companies can use to sense-check upcoming deals. The system uses real-time credit scoring, and cloud-based business intelligence software to capture over 180,000 daily data updates. West was previously a regional sales manager for IBM, and is no stranger to the value of company insights. “I’ve always had a passion and understanding about good data and how it can impact sales and marketing,” he said.

Like in so many industries, identifying patterns in large volumes of information is transformative. Doubling up on behavioural-based as well as data-driven algorithms, can alert clients to dangers that they wouldn’t otherwise know about. Speeding up the way that these alerts are produced is another positive. “It’s a really powerful combination,” West comments. “That’s what’s giving us a competitive advantage at a time when people can’t afford to make bad decisions.”


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Sales boost and UX considerations

Red Flag Alert’s offering highlights that the benefits of credit scoring go beyond due diligence. As well as using platforms for customer onboarding, hundreds of data points can be used to signal potential sales prospects and discover what true customers may look like. Scaling up on data can help boost sales at the same time as avoiding credit risk. Furthermore, systems can help businesses stay compliant – for example, it’s possible to perform an anti-money laundering (AML) check on a company in less than a minute.

Considering user experience, it’s important that information is provided in an easy-to-use package. For example, data visualisation should enable non-specialist industries to use the platform and understand the data. It’s a good result for everyone if all users can determine what “good” credit looks like.

Maybe that’s why, according to West, credit scoring systems are increasingly appealing to non-traditional clients, as well as the usual white-collar industries. “Non-traditional businesses come to us looking for that additional level of insight, where they can protect their business by making sure that they’re not overexposing themselves with a supplier [that would] impact their future sales,” he said.

SME sensitivity

SMEs tend to be the most impacted by rising energy costs. Combine this with a company that’s reliant on a volatile sector as a supply chain, and you’re treading a fine line that broken trust would wipe out. For example, according to a Red Flag Alert report, construction has one of the highest levels of insolvency in the UK.

With due diligence performed using platforms such as Red Flag Alert’s collated sources of data, and database of companies, users can feel safer in the knowledge that they aren’t partnering with a company that won’t last the year. For more details, visit the company’s website