Financial poverty is defined by how deprived a citizen is in terms of their access to financial resources, and how much this impacts their standard of living. According to the World Bank, one in 10 people in the world live under the international poverty line of $1.90 per day. What’s more, there are a staggering 1.7 billion ‘unbanked’ adults across the globe – individuals with no bank account or access to financial support, such as loans. Furthermore, 200 million micro, small and medium-sized businesses in growth markets lack access to savings and credit, according to a recent McKinsey report.
While financial inclusion is on the rise, there is more to be done to help pull nations out of financial poverty and into a world that offers more equal opportunities
While financial inclusion is certainly on the rise, there is more work to be done to help pull nations out of financial poverty and into a world that offers more equal opportunities. Unfortunately, current banking infrastructures, particularly in developing regions such as Africa, are only now becoming equipped to create this new economic environment. Thanks to worldwide initiatives, spearheaded initially by the World Bank and now by fintech disruptors armed with new tools and techniques, the unbanked have a brighter future ahead. It all starts with the right foundations.
Laying the foundations
In April 2013, the World Bank set a goal– to have no more than three percent of the world’s population living on the international poverty line by 2030. Since then, the institution has been on a mission to implement poverty reduction strategies, which involve providing the necessary financial products and assistance.
Part of this strategy includes developing a more robust banking infrastructure, supported by private sector investors and the participation of local and foreign businesses, that can more appropriately support economic growth. The installation of credit bureaus, which provide advisory services, infrastructure, credit risk management technologies and support to central banks and other private sector stakeholders, has helped banks in many countries to make more informed decisions about lending. But what about unlocking the huge population of unbanked individuals? How can these credit bureaus help financial institutions cast a wider net for formal lending?
Bureaus with a difference
In essence, credit bureaus work alongside banks and other lenders in providing credit history information on citizens. Credit histories are usually a record of a citizen’s ability to pay back debts, with information sources including banks, microfinance, credit card companies and collection agencies. This aggregated data is then put through an algorithm which can tell a potential lender how likely it is that ‘Mr. X’ will pay back the loan he applied for. However, what happens if you don’t have information on the citizen or SME to start with?
In developing regions, many of the unbanked population have very little, or next to no, credit history. Also known as ‘thin file customers’, these individuals are screened out by traditional lending and underwriting methods because credit bureaus can’t provide an accurate picture of solvency to lenders. It’s a catch-22 as, without banks taking a leap of faith, these unbanked individuals can’t prove they are creditworthy. However, some forward-thinking credit bureaus are joining the new era of fintech companies, with a new approach to risk management. By unlocking new data sources, unbanked individuals can be afforded the same access to financial support that others across the world enjoy.
Gateway to inclusion
Believe it or not, personality can be a good indicator of how risk averse or risk tolerant an individual is likely to be when it comes to handling their finances. There are now solutions available, which are already being used by established credit bureaus and financial institutions, that use psychometric testing to generate information on potential customers. Individuals are presented with an image-based quiz, designed to deliberately trigger an instinctive and emotional response. Based on the responses, individuals are assigned a risk score, which highlights how self-disciplined the applicant is.
This new data generated on individuals’ personalities and their likely behaviour is combined with existing risk assessment processes to produce a rounder picture of a citizen. The psychometric test can also be expanded to business loans, allowing more companies to start and expand. By marrying psychology with a traditional approach to risk management, lenders can reduce their own risk with existing customers, as well as ‘bank’ the unbanked population that don’t have access to finance.
Building a data picture
It’s not just an individual’s personality that can provide insight into creditworthiness. In Africa, microfinance institutions can base their credit scoring on smartphone metadata. The lender can collect a wealth of information on call and SMS history, geolocation, contacts, and browsing history, which then adds to the package for the credit analysis of thin files. Mobile lending doesn’t require a smartphone, and in fact pre-dates the birth of the iPhone. However, given the increased functionality that today’s smartphones provide, lenders are able to pull from more data sources than ever before.
Some fintech companies are taking things one step further, with a new end-to-end mobile lending solution that can help tap into the global unbanked population. Presented as an app, the underlying technologies include a decision engine, that consumes data from credit bureaus, core banking systems, mobile wallets, psychometric testing and mobile phone meta data. Artificial intelligence then applies algorithms to the data, to present the lender with a user credit score, as well as the necessary fraud prevention checks. Other external data sources can be scraped and inputted into the platform for a more holistic view of creditworthiness.
For example, the app could take Google Analytics data, combined with financial data inputted into accounting software Quickbooks, to determine whether the owner of an e-shop would be able to pay back loans, based on the financial performance of the shop. Alternatively, lenders could determine the creditworthiness of a farmer based on agricultural data inputted into the decision engine – how much land the farmer owns, how much it costs to maintain the farm, the predicted prices in the market for wheat this year, and so on.
In short, the fusion of many different data sources, presented into an easy-to-use app format, will allow lenders to make better, more informed decisions on those individuals who previously might have been turned down for credit. The more data sources that can be plugged into the app, the more powerful the analysis for the credit lender.
Cashing in on the future
It’s not just the individual citizen or SME who is impacted by the lack of banking infrastructure and support. Countries the world over are being held back from furthering innovation, developing their economies and growing their workforces, because budding small businesses – with ‘unbanked’ entrepreneurs at their helm – are forced to fail, rather than thrive.
However, the recent wave of change in the credit risk management industry, facilitated by investment into new technologies by both disruptive fintech companies and more established, best-in-breed credit bureaus, promises to narrow the chasm between poverty and financial inclusion in the longer-term.
For more information, please visit the Creditinfo website