Last week the US Patent and Trademark Office published a patent application submitted by the Royal Bank of Canada (RBC) for a blockchain system that can automate credit scoring processes. The application discusses existing problems with credit scoring systems and proposes solutions using a distributed ledger that links individuals’ identity and credit information and provides more transparency regarding the way in which credit scores are calculated. The system is meant to not only provide more accurate credit scores, but also to reduce opacity so individuals can better understand the factors that contribute to their credit scores, allowing them to proactively work to improve them.
The application cites several issues with current credit scoring systems. First, individuals are generally not aware of all the factors that influence their credit score. They are not notified when their credit score changes, or what caused any changes. Sources of credit score information are also limited to traditional credit bureaus. Even if individuals did have access to all the factors that affect their credit scores, the methods used to actually calculate scores are very unclear in many cases.
RBC hopes to solve all these problems with their blockchain system. The platform will leverage smart contracts to accurately update credit scores in real time whenever a change occurs. The automated system will notify individuals of any changes and provide insight as to the reasons for those changes. The immutability provided by blockchain technology will allow for more accurate calculation of credit scores because more historical information will be available in a consistent format.
RBC hopes to integrate their credit scoring systems with loan origination systems so anytime loan applications are submitted, the distributed ledger can be referenced and automatically determine the appropriate loan type and credit for the applicant. After this is determined, the loan terms will be generated as a smart contract.
Automated credit scoring is another natural financial application of blockchain technology, of which there are many. RBC has explored blockchain for other purposes, including automated, distributed interbank settlements. The CEO of RBC, David McKay, has expressed support for blockchain technology in the past, despite his skepticism regarding the value of Bitcoin.
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