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Credit Scores Are Us

Credit scores have become a fact of life. No one really enjoys thinking about their credit score, but regardless, they are an integral component of financial glue that brings the world together. Credit scores enable house loans, business loans, credit cards, or just financing in general, and have been a central component to the significant growth seen in the last few centuries.

It seems as though the “credit score” emerged accidentally. Without government involvement, oversight, or guidance, the credit reporting industry arrived out of the need to evaluate risk. Lenders needed a standardized way to vet borrowers, and borrowers needed a way to prove their worthiness to lenders. Credit scores enable borrowers to stake their reputation in order to receive the money they need to finance major investments (home, car, business, etc…)

While your credit score is often not a fun topic, we must give credit where credit is due…

Credit Bootstrapped the Modern World

The Medici Bank, established 1397, is credited by some historians as the fuel that kick-started the modern world. The Medici Bank was the first institution that truly popularized lending as a financial tool. Giving out loans to credit-worthy individuals allowed the Medici bank to profit off of its own capital, but more importantly, it established a system of evaluating the creditworthiness of borrowers, and enabled trust in providing capital to those who needed it. The Medici Bank systematized trust, allowing it to scale, reaching a much broader client base.

The establishment of the systematized lender-borrower relationship re-organized the way the world was viewed. Before the establishment of credit, the common attitude was that the economic pie did not grow, and to lend your money was to lose it. The Medici Bank was able to invalidate this thesis, by lending out money in order to receive more in return, while enabling an entrepreneur or business owner the money they so desperately needed in order to establish or expand their business. A win-win situation. This model allowed people to build the present, by leveraging the future.

While the link is unproven, it is perhaps the establishment of credit in the 1400’s that triggered the Renaissance. The Renaissance brought humans into modernity, by kickstarting a 600 year scientific bull market, and the greatest phase of quality-of-life improvements found in human history.

“…commercial credit among Florentine companies were indeed highly correlated with [the growth of a] wide range of noneconomic or social relationships ”

— Economic Credit in Renaissance Florence

The invention of the scientific method met the world of innovators and entrepreneurs, bridged by credit, and a belief in the future. The business opportunities that arose after the establishment of credit made innovation and experimentation profitable and created the necessary incentive for entrepreneurs to take the risk required of spending someone else’s money. Credit formalized the risk-reward relationship, allowing entrepreneurs to accurately measure risk, in search of greater reward down the road.

Not Built for Globalism

The establishment of credit and development of a credit system certainly quickened the pace of human development. However, it did so unequally. Europe blossomed by this innovation, and that carried over to the U.S., which further rewarded risk-taking by enabling entrepreneurs to allocate debt to an LLC, rather than owning the debt themselves.

Other countries have not moved so quickly. Not all countries have a well-functioning credit system, and even fewer credit systems exist that transfer across borders. Generally speaking, geographic regions that have credit systems that translate across borders are the countries that people move to, not from. The financially underserved populations are the populations that would most benefit from a transferrable credit score, as they migrate to seek opportunities in more financially developed countries.

There are over 20 different credit score standards globally. While each system uses similar data, this data is often owned by corporations located inside a particular country. As we know, corporations do not share data well; it’s their competitive edge. Therefore, large swaths of data that make up someone’s credit score is relegated to local relevance. Any migration away from where the credit was established is a commitment to start from scratch.

This is not the world we want to live in. The world is trending towards globalization, not away from it. As fragmented as the global credit system is, it still can transcend borders to some degree, albeit often with loss of data due to a lack of trust or “translation” across various credit-providing entities. Countries with interconnected finance systems are able to provide basal amounts of credit data. For example, the EU has a less fragmented credit system than what is found globally, due to unified monetary system of the region. However, even with this interconnectedness, there is much to improve. Global credit data standardization and international trust of this data requires a financial platform that is not bound to a local region or country, but is instead ubiquitous across the world.

Enter Blockchain: The Global Financial Fabric

With the advent of blockchains, we have the infrastructure required to create a global system of accounting verifiable payment data. We now have a system that can bridge user credit data between countries that otherwise wouldn’t be able to share it. Rather than just a few financial centers spread unevenly across the world, a blockchain-based economy provides a financial fabric that enables financial data to become available equally across the globe.

A blockchain-based financial system means that the same financial tools are available to both Venezuelans and U.S. Americans. The same financial platform is accessible regardless of what border you cross, or legal providence you reside. Blockchains provide the opportunity to create globally unifying infrastructure, where everyone plays on the same field, and data is perpetually available.

Data: Return to Owner

The reason why the credit reporting industry is so fragmented and non-interoperable is due to companies restricting access to the data they collect on their users. Sharing data is akin to losing your competitive edge. As a result, your credit score is attributed to you, by companies that you interact with. Credit bureaus like Experian or Equifax generate their business by collecting this data however they can, and selling it to those who want to measure your level of trust. These pseudo-nationalized systems stop at the border, as the lines of communication between credit bureau and businesses break down the further apart they are.

The Sovereign Credit Score

“Blockchain-based identity” is a nebulous topic. The industry is working to redefine what it means to have an internet-based identity that is independent of any government or corporate-based system. How do we create a system of identification that doesn’t require a government ID, or a “Login with Facebook” button? While these problems are currently being researched and iterated on, a regular Ethereum or Bitcoin address has been functioning as the ‘beta’ for this future product for years now.

With a blockchain-based payment system, your payment data, and therefore your creditworthiness and reputation, can be the payment history recorded on the blockchain, and linked to the wallet that you transact with. On-time payments can be verified from any region, at any time, by anyone, thanks to the public immutable ledger of a blockchain. Gone are the days of siloed personal payment data. This new system provides the opportunity for a good credit history to be carried with you, wherever you go.

While still in its infancy, privacy solutions like ZK-Snarks and Starks, enable many future possibilities with creating a credit score or payment history that is also private, only to be revealed at the discretion of the wallet owner.

Starting with a New Foundation

Your credit score is made up of a variety of different factors. Roughly 35% of your credit score is weighted towards your payment history. What bills do you pay, how big are they, and do you pay them on time? 15% is weighted to how large your payment history is. Do you have a record of on-time payments for the last 12 months? Or 12 years? Between these two things, 50% of your FICO credit score is determined (But remember, this is only U.S.A’s method. Other countries have other standards).

Rent

Rent: The largest payments that the typical consumer makes in a year. Occurring 12 times at specific intervals, rent provides the largest indicator of someones ability to make timely payments. Rent payments are likely the largest monthly transaction an individual makes, and also have a very specific due date that a renter must adhere to. Paying rent, and paying it on-time, is ubiquitous across the globe. This makes it a very strong candidate for standardized and systematized credit data profiling, as it is very easy to compare this data across individuals. [You could acknowledge mortgage payments here as well, but that banks are likely not ready to adopt, so the concept is easier to prove out in the rental market]

Unfortunately, this significant piece of consumer payment data is reported less than 1% of the time. This is because many rental payments are made directly by tenants to their landlords either through a proprietary payment portal, bank transfer, or check, making it difficult for credit reporting systems to collect this information for integration into credit reports. Yet, data reflecting timely payment of rent is precisely the information landlords are looking for. Instead, landlords must rely on traditional credit scores, lacking such information, to evaluate the likelihood that the prospective tenant will pay their rent on time.

For a global world, with global financial infrastructure, an immutable record of rental payments can add crucial data to someone’s creditworthiness. This is especially relevant for those who are highly transient. The National Apartment Association’s 2014 survey found a 54% yearly tenant turnover rate in the United States. This means that half of tenants move every year, and the average length of stay is 2 years. Even in financially well-served USA, a tenant must abandon their history of timely rental payments every time they move.

This is just the tip of the iceberg, however. Migrants moving from country to country have no mechanism to bring their history of timely rental payments with them. This is one of many mechanisms in which inequality is perpetuated, as new immigrants to a country have no way to prove any amount of creditworthiness, reducing their competitive edge in sourcing housing, starting a business, or any other activity fueled by credit. Immigrants with an extensive history of timely rent payments have no way of proving that to the new financial system to which they’ve entered, and they must start from scratch.

The Kahuna Score: The Sovereign Credit Score

The Kahuna Platform is establishing the first iteration of a user-owned and operated measure of their history as a rent-paying tenant. By capturing this data inside the Ethereum blockchain, participants who pay or receive rent through the Kahuna system have an alternative mechanism to prove their worthiness as a tenant, no matter what country they live in.

Landlords across financially mature nations often require a credit score check prior to a tenant moving in. This is especially true for property management companies, who manage high volumes of units, and need a way to standardize risk profiling, and look to a credit score in order to do that.

This is to the detriment of any financially underserved, or migrant tenant. The absence of a credit history, or the inability to take ones credit history as they migrate, reduces their ability to access housing in their new country of residence. Even when they may have a robust history of timely rental payments, proving this can be very challenging.

The Kahuna Score is designed to solve this problem. An algorithmically calculated score based on an aggregation of data from user-submitted profile information, rental payment and deposit history, as well as tenant behavioral history. Relevant data points will be added automatically based on the user’s behavior and adherence to the criteria established by the rental property manager or landlord.

As part of the platform onboarding process, tenants will have the option of providing data that helps establish creditworthiness in order to bootstrap their profiles. Tenants may then release to landlords or other third parties all or some of the information contained within their profiles that is used to determine the Kahuna Score. This process will begin with the landlord submitting a pull request for the information that will have to be approved by the tenant. Once a tenant grants access to their profile, the Landlord will be able to review the tenant’s rental history and relevant documentation, as well as behavioral and payment information previously committed to the blockchain. This data will be committed to the blockchain and will only be released to other parties if the user approves access. Access will be granted once the tenant signs an access request using their private key, which will be managed within the application

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The Kahuna Group, a leading real estate developer and brokerage company, aims to change the way everyone within the rental ecosystem leases, rents, and earns using blockchain technology. The blockchain-based solution Kahuna builds will streamline the search, on-boarding, and tenancy stages for both landlords and tenants. With The Kahuna Platform–and the Kahuna Score, Wallet and Token–the future of tenant reputation is being revolutionized, and a new era and standard of leasing, selling and buying property is possible.