As written in our recent post, The Impact of Web3 on Banking, the future of the internet and banking will be built in large part on distributed infrastructure, including blockchains (aka ‘on-chain’). This is an exciting time for financial services because the transition to blockchains has tremendous potential to redefine transactions.
Since the proliferation of the internet, third-party aggregators with pipes to consumer data have been the predominant drivers of growth across the value chain in financial services. Blockchain technology challenges this value proposition to its core. Innovations in on-chain applications are providing broader access to highly personalized financial products in real time all the while increasing privacy. This is especially the case for credit.
In Web2, centralized companies, such as credit bureaus, are encouraged to monetize financial data because it’s costly to aggregate, store, and productize in a valuable way for lenders. The consumer credit market in the U.S. surpassed $16 trillion last quarter1 and depends on the four largest credit report providers — Equifax®, Experian®, TransUnion®, and FICO®. These four companies played a large part in shaping credit accessibility and in the process, accumulated a combined market cap of $70 billion2.
In Web3, data is no longer the moat because transactions are recorded on immutable public ledgers. As a result, blockchains, instead of bureaus, will be the largest source of truth for financial activity. Credit reports and ratings will remain essential to the efficient distribution of credit to billions of households and businesses, but scores will require fundamentally different business models. Financial institutions and traditional lenders will need to keep close attention to these developments to future-proof their borrowing businesses.
That is why we are thrilled to announce that Truist Ventures invested in Spectral, a start-up pioneering credit risk assessment infrastructure in Web3. We are excited to partner with the founders, Sishir Varghes, Srikar Varadaraj, and Kevin Choi on their mission to reinvent credit worthiness tuned to the ethos of Web3.
Enter Spectral. The U.S. Department of Treasury reported in September that at least 12% of Americans own digital assets. Coinbase and Blockchain.com—the two largest blockchain wallet providers—combined reported over 170M blockchain wallets worldwide. Bitcoin and Ethereum blockchains processed over half a billion transactions in 2021 alone and are on track to clear over $10 trillion of transactions by the end of this year.
Despite the outflows to blockchains, once bank customers transfer money from their account to on-chain digital wallets or exchanges, banks have zero visibility into what happens next. For example, DeFi (Decentralized Finance) loans that are obtained on-chain are not reported to credit bureaus and the majority of banks do not have the tools to custody or collateralize digital assets for customer with significant on-chain portfolios. Spectral experienced early traction with financial institutions because the company’s products solve for blockchain visibly by turning on-chain activity into valuable signals for lenders.
As more financial activity shifts on-chain, we believe Spectral’s credit risk infrastructure is well positioned to define and scale the next iteration of credit in Web3. As a Truist Ventures portfolio company, we are excited for Spectral to engage with Truist’s platform on this journey.
The founders built an impressive team of experts in cryptography, data science, and traditional credit modeling to develop programmable creditworthiness that will be interoperable between lenders on and off chain. Spectral developed the Multi-Asset Credit Risk Oracle (MACRO) Score, which is the on-chain equivalent of a FICO® score except generated from a user’s on-chain activity. Users can link one or a bundle of digital wallets on Spectral’s App to generate a composable credit score near-instantly, processing all the on-chain data associated with the user’s wallet(s), including DeFi borrowing and repayment history, liquidation history, loan safety margin, wallet balances and assets, on-chain behavior, and market conditions.
Today, credit bureaus use loan history to determine a borrower’s willingness to pay but the ability to repay loans is largely left out of the equation. This approach is limited by available data and income verification frequently acts as a proxy to determine ability to repay. As a result, underbanked people without loan histories can face challenges accessing credit.
Spectral is a direct strike on this problem. With Spectral’s MACRO score, users can leverage their on-chain assets to establish ability to repay and their overall on-chain activity in Web3 to establish willingness to repay. This approach has the potential to enable the underbanked to take ownership of their creditworthiness.
The DeFi community already loves Spectral. The company debuted the Spectral App and MACRO score in Open Beta earlier this Summer and generated over 30,000 unique MACRO scores in less than three weeks. Spectral will add capital efficiency to DeFi lending protocols that currently require borrowers to custody collateral up to 150% of loan. Overcollateralization in DeFi is a direct result of the lack of credit infrastructure. By integrating Spectral’s MACRO score, DeFi protocols can offer unsecured or undercollateralized loans at scale for the first time.
Blockchain enabled banking like this marks a shift away from the straightforward digitization of branch-based banking products and towards the development of new banking experiences altogether. Spectral’s ambitions are encouraging and align with Truist’s purpose to inspire and build better lives and communities. We look forward to expanding our partnership with Spectral to help shape the future of finance.