Interview with Scoredex manager Johann Sternberg about credit ratings, credit agencies and the problems concerning to the rating of small and medium companies.
Question: Mr. Sternberg. Scoredex was founded in winter 2012 and competes with a variety of rating agencies. Is there really space for another player?
Sternberg: This is a really good question, which we asked ourselves before we founded Scoredex. And there was only one answer remaining: YES! There is a variety of reasons for our decision. First of all I have to mention, that we do not see ourselves as competitors to the credit bureaus. They offer only examination of the creditworthiness of a company or a person. This only gives you the statistical probability of default within the next 12 months. This time horizon is too short for Scoredex. All atypical involvements or investment in closed-end investment products have a horizon of at least five, usually 10 or more years. Consequently, it is not very helpful to use classic credit checks. However we buy the data from reputable credit bureaus and use the data to create the Scoredex. But there is one big difference: when the credit bureaus stop their research, the work of Scoredex begins.
Question: What´s the difference between your work and the work of credit bureaus?
Sternberg: First and foremost, we take a holistic approach. So we use significantly more data than a traditional credit check. In the first step, we consider data about the company and the entrepreneur, supplied to us from interfaces. These includes trade register, bankruptcy courts, two large credit bureaus, geo-marketing-data and an evaluation of online and print press. Postdoctoral our reputation manager contact the company to verify the available data for completeness and correctness. During the interview about 120 questions need to be answered. All of them aim at the reliability and continuity of the business or decision-makers. At the end of the scoring process all the data getting compressed to a score – the „Scoredex“. This enables us to reduce the error rate significantly comparing with classic credit bureaus, which produce error rates between 40% and 70%.
Question: That sounds very good. But do you have the expertise to conduct such business valuations? Isn´t the project a little bit presumptuous? And why should investors trust your evaluation?
Sternberg: As a matter of principle investors should inform themselves and form their own opinions. Unfortunately this is the responsibility of every investor. We just offer an aggregation of the most important information available. Our benefits are information, which can only be found with a high investment of time and financial resources. And as a matter of fact those informations are very important. The investor is almost left on his own while he attempts to compare different investment opportunities. The prospectuses of all the offers look top notch. But the reality shows the dangers existing. Just take a look at the many real estate funds which have been closed in the past years. Or think of the damage caused a few years ago by the highly acclaimed film funds.
We deal with the market and the risks, especially the grey-market, for years. Our parent company GoMoPa reports since 12 years about con men and swindlers in these market segments. However Scoredex uses the reversed approach. Not the unscrupulous firms are named as what they are – that’s still the business of GoMoPa – but the reputable companies will be highlighted and promoted.
Question: Well, your approach may differ from credit bureaus, but there is still a huge number of rating agencies. These are using a medium-and long-term time horizon, similar to the approach of Scoredex.
Sternberg: That indeed is true, but in our opinion the rating agencies have two major problems. The customers of large and medium-sized agencies are to 100% large corporations. Most of them are legally obliged to submit such ratings to inform their investors or the authorities. Small and medium-sized enterprises, which make up the vast majority of the financial and real estate market, are usually not rated by the rating agencies. The decisive factor is the price of such ratings, which end up in the five-to six-figure range. Due to the very high degree of automation Scroredex can offer the examination of small and medium companies free of charge. Only further services such as licensing rights for the seal of approval has to be paid by the rated companies.
The second and most important issue is the financing of the rating agencies. On one hand the ratings have to be independent, on the other hand the ratings are paid for by the rated entities. The agencies are almost in a permanent moral hazard situation. That means: they need to meet the demands of their clients, who understandably expect a good rating for their money. On the other hand investors should be able to rely on the supposedly independent analysis. As a result of this situation a bad credit rating can cost the agency a customer. On the other hand a falsely good rating can cause financial losses for investors who rely on the ratings. Some companies are used to buy several ratings from different agencies, but only publish the best one. The situation is aggravated by the strong competition between the rating agencies. Exactly such dependencies we tried to avoid in the founding of Scoredex.
Question: Alright, that even sounds good. But you won´t tell me that you run your business without getting paid.
Sternberg: Of course we are no samaritan. We are committed to our shareholders and the market conditions like every other company. Accordingly there´s still a working business model, but also a higher purpose: the increase of transparency and confidence in these high-risk market segments.
The financing of Scoredex is based on a dual payment system. The dossiers on www.scoredex.com can be accessed by users for a small fee of € 9.90 per profile. For this small price Scoredex delivers a diversity of information and by the way beats the prices of credit rating agencies by length. The first researches of a company are even free of charge for our users. The alternative for companies with a high score is to unlock the profile for a revenue-based annual fee. If this option is used all Scoredex users can see the profile for free.
Question: I see. You are depended on the rated companies.
Sternberg: Most important to us is our independence! We are not reliant on companies to give us application. All our files are created neutral and independent. And we only offer our premium services to the well-rated companies, which can use it for their marketing. Indeed this corresponds to our vision: market adjustment and a shift in sales from dubious to reputable companies.
Please note, that nothing changes for the companies whether they buy their dossier or not. In the second case potential investors needs to invest a few euros for this exclusive information.