Before the year 1995, credit score was a mysterious 3-digit number which most of us didn’t understand, only the loan officers in the banks knew what it was. With steady growth of credit-based economy, many more understand it better now, however, considerable mystery still remains vis-a-vis credit score. Royal Bank of Canada (RBC) has applied for a patent, based on blockchain, which can change that.
A consumer, looking for credit, needs to ensure that her credit score is healthy. However, currently most consumers don’t have enough insight on what goes into calculation of their credit score. Without understanding this, they can’t take proactive steps to improve credit score either.
A technology solution offering transparency to consumers will be helpful, but only if the personal credit data of the consumer, which goes into calculating her credit score, can be protected from the malicious users. Additionally, the technology solution should also be able to use marketplace information, and identify right creditors for a given loan request and credit score. For, every loan successfully repaid ultimately goes into improving one’s credit score, and a loan agreement derived from competitive marketplace information will have better chance of successful closure.
RBC has identified blockchain technology for this, and the decision is driven by the promise of decentralization and immutable record that the technology offers. The distributed database in a blockchain is maintained by nodes, i.e. computers on the network, where every node has complete information on blockchain, and every node has equal authority. The consensus algorithm of blockchain ensures that only the transactions validated by the majority of nodes can be recorded by blockchain. Only the node that completes a massive number-crunching operation at high-speed, to solve a cryptographic puzzle, gets to record a transaction. Such rigor makes records in blockchain immutable.
The solution proposed in the patent application is following:
- When a loan application is submitted, the system will scan marketplace data.
- It will automatically determine what sort of loan and creditors are appropriate given the credit score of the loan applicant.
- The system will generate a smart contract, i.e. piece of code running on blockchain that allows completion of legal-like functions such as taking control of an entity based on certain conditions.
- The smart contract will govern the transaction, and it contains the terms and conditions (T&Cs) of the loan.
- Credit records stored on blockchain are immutable, and with each loan successfully repaid, the credit rating will improve.
The proposed system automates every step of the credit rating process, and is transparent to the user. The user can take tangible steps to improve their credit score.
- IBM is planning to enter the crypto space;
- Microsoft is planning to invest into blockchain start-ups through their venture capital (VC) arm;
- Intel has filed a patent application to leverage the intense computing power used in blockchain for genetic sequencing.