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Explainable AI for Interpretable Credit Scoring

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  • Lara Marie Demajo
  • Vince Vella
  • Alexiei Dingli

Abstract

With the ever-growing achievements in Artificial Intelligence (AI) and the recent boosted enthusiasm in Financial Technology (FinTech), applications such as credit scoring have gained substantial academic interest. Credit scoring helps financial experts make better decisions regarding whether or not to accept a loan application, such that loans with a high probability of default are not accepted. Apart from the noisy and highly imbalanced data challenges faced by such credit scoring models, recent regulations such as the `right to explanation' introduced by the General Data Protection Regulation (GDPR) and the Equal Credit Opportunity Act (ECOA) have added the need for model interpretability to ensure that algorithmic decisions are understandable and coherent. An interesting concept that has been recently introduced is eXplainable AI (XAI), which focuses on making black-box models more interpretable. In this work, we present a credit scoring model that is both accurate and interpretable. For classification, state-of-the-art performance on the Home Equity Line of Credit (HELOC) and Lending Club (LC) Datasets is achieved using the Extreme Gradient Boosting (XGBoost) model. The model is then further enhanced with a 360-degree explanation framework, which provides different explanations (i.e. global, local feature-based and local instance-based) that are required by different people in different situations. Evaluation through the use of functionallygrounded, application-grounded and human-grounded analysis show that the explanations provided are simple, consistent as well as satisfy the six predetermined hypotheses testing for correctness, effectiveness, easy understanding, detail sufficiency and trustworthiness.

Suggested Citation

  • Lara Marie Demajo & Vince Vella & Alexiei Dingli, 2020. "Explainable AI for Interpretable Credit Scoring," Papers 2012.03749, arXiv.org.
  • Handle: RePEc:arx:papers:2012.03749
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    References listed on IDEAS

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    1. Carlos Serrano-Cinca & Begoña Gutiérrez-Nieto & Luz López-Palacios, 2015. "Determinants of Default in P2P Lending," PLOS ONE, Public Library of Science, vol. 10(10), pages 1-22, October.
    2. Martens, David & Baesens, Bart & Van Gestel, Tony & Vanthienen, Jan, 2007. "Comprehensible credit scoring models using rule extraction from support vector machines," European Journal of Operational Research, Elsevier, vol. 183(3), pages 1466-1476, December.
    3. Bart Baesens & Rudy Setiono & Christophe Mues & Jan Vanthienen, 2003. "Using Neural Network Rule Extraction and Decision Tables for Credit-Risk Evaluation," Management Science, INFORMS, vol. 49(3), pages 312-329, March.
    4. Sebastian Bach & Alexander Binder & Grégoire Montavon & Frederick Klauschen & Klaus-Robert Müller & Wojciech Samek, 2015. "On Pixel-Wise Explanations for Non-Linear Classifier Decisions by Layer-Wise Relevance Propagation," PLOS ONE, Public Library of Science, vol. 10(7), pages 1-46, July.
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    Cited by:

    1. Damiano Brigo & Xiaoshan Huang & Andrea Pallavicini & Haitz Saez de Ocariz Borde, 2021. "Interpretability in deep learning for finance: a case study for the Heston model," Papers 2104.09476, arXiv.org.
    2. Emer Owens & Barry Sheehan & Martin Mullins & Martin Cunneen & Juliane Ressel & German Castignani, 2022. "Explainable Artificial Intelligence (XAI) in Insurance," Risks, MDPI, vol. 10(12), pages 1-50, December.
    3. Jorge Tejero, 2022. "Unwrapping black box models A case study in credit risk," Financial Stability Review, Banco de España, issue Autumn.
    4. Jorge Tejero, 2022. "Unwrapping black box models A case study in credit risk," Revista de Estabilidad Financiera, Banco de España, issue NOV.
    5. Guner Altan & Server Demirci, 2022. "Credit Scoring on Cash Flow Table with Machine Learning: XGBoost Approach," Journal of Economic Policy Researches, Istanbul University, Faculty of Economics, vol. 9(2), pages 397-424, July.
    6. Jorge Tejero, 2022. "Unwrapping black box models A case study in credit risk," Financial Stability Review, Banco de España, issue NOV.

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