The money lending industry has always been very strong. With consumers needing to purchase goods and durable goods becoming more expensive, there has been a rise in demand for credit. More companies are jumping on this and offering money lending services to those who need it.
Like all other industries, the money lending industry is progressing with time, and firms are looking to see how they can integrate new technology.
Regulators and governments are keen to see how technology can better inform credit decisions and protect consumers. The protection of consumers is not just a moral concern, but a macro-economic one as high levels of debt can be damaging to the economy.
Leading experts have been particularly interested in psychometric data about consumers. This partnership has the potential to have a significant impact on the money lending industry.
Read on to learn more about psychometrics and how credit companies can use it in the money lending market that was first covered on the How to Lend Money to Strangers podcast.
What is Psychometrics?
Psychometrics is a branch of psychology that focuses on measuring mental capacities and tendencies. Psychometrics is more focused on quantitative psychology measures to provide in-depth statistics of a person’s mental processes.
Psychometrics also covers how data is handled and combined. This focus on statistical data means experts can apply it in other disciplines other than just psychology. Any industry associated with social science can benefit from psychometric analysis.
The money lending industry is heavily involved with different individuals and how they behave. Things such as credit scores are already based on a statistical analysis of past consumer decisions. So psychometrics could be helpful to analyze a person and their mental processes when it comes to loaning out money.
How can Psychometrics be used in the Money Lending Industry?
Most companies will already have lots of data on what customers are doing, how they tend to lend out money, and how they pay it back. This gives firms a general overview of what consumers are doing, but it doesn’t tell them why they are doing it.
Psychometric data has the advantage of allowing firms to understand why consumers are acting in a certain way. A psychometric profile may give clues as to the motives behind taking out money and how consumers tend to handle credit.
Understanding why actions are taken gives firms a better chance of predicting the outcome of future decisions.
Problems with Traditional Credit Scores
Currently, credit scores are the most popular way of assessing customers within the money lending industry. Credit scores play a crucial role in most consumers’ ability to take out credit.
The higher the credit score, the more reliable the consumer is viewed by money lending firms. Higher credit scores may receive lower levels of interest or collateral needed to take out loans.
However, this system is not foolproof and can prove challenging for firms. Most credit scores tend to clump around only a few different points. Instead of providing an even range for each individual, it separates individuals into different groups.
Using psychometric data, you get a better even spread of data. Instead of just ‘unreliable lendees,’ you better gauge how these lenders may act.
Collecting Psychometric Data in the Lending Industry
For psychometric data to be valuable, it needs to be pretty specific and detailed. This can be pretty difficult to carry out in practice, especially for companies with many customers.
One process that could be instrumental to collecting data is the idea of ‘Gamifying Credit Scores.’ This allows customers to take part in a credit score game to collect data about their tendencies.
Gamifying credit scores will provide pretty accurate observations of consumers since it helps firms see how customers would act when given specific options. This allows for an accurate psychological profile of consumers that firms will be able to collect psychometric data from.