Developed nations like the US, Australia, Canada and the UK typically base creditworthiness on a consumer’s income, their loan repayment history and the health of the credit lines companies have extended to them. However, in undeveloped nations, there is no way to measure creditworthiness using these factors. Consider a farmer who wants to purchase more land to grow more crops or to raise more animals like goats or cows to produce more milk. Consider a local seamstress or baker who wants to expand her business by hiring an employee or expanding her product line. How should a bank determine loan eligibility for borrowers such as these?
Pundits are considering many solutions to the problem. However, one idea seems to offer some hope or a step in the right direction. Though many people in developing nations don’t have regular access to the internet, almost all of them use mobile phones regularly. Mobile network operators or MNOs collect volumes of information on consumers every day in the form of call and text records.
Yet, how in the world can a lender assess a person’s credit risk based on such seemingly irrelevant data?
Three forms of this “alternative data,” are actually powerful indicators of whether someone is a good or bad credit risk. These approaches for credit scoring for largely unbanked populations are online activity, psychometrics and mobile data.
Online activity is not relevant in all third world countries. However, in the countries whose residents do have access to the internet and use it regularly, companies that measure online data use the digital footprints people create when they use social networks and e-commerce platforms like Twitter, Facebook, LinkedIn, Amazon and Ebay. A person’s behaviour on these sites can gauge things like income, stability and the size of that person’s professional network.
Though psychometrics sound like a fancy, technical area of study, it’s something many people are familiar with. For example, companies generate psychometric data when they conduct employee screens via survey. These surveys typically ask you multiple questions about how you would handle different professional situations and can gauge personality qualities like honesty, leadership, autonomy, confidence, numerical reasoning skills and opportunism.
Because most people in developing countries have mobile phones and use them regularly for financial transactions, mobile data looks like the most promising, viable way to measure credit worthiness in developing countries. Mobile phone records that show long trails of timely payments, slightly late or late yet consistent payments, calls to and from creditors, financial transactions between friends, family and acquaintances etc., tell a story. These call detail records, (CDR’s) and transaction detail records, (TDR’s) can gauge qualities like the size of a someone’s personal financial network along with financial stability.