By Michel Massain
With Sub-Saharan Africa accounting for 45.6% of mobile money activity in the world estimated at about (excluding bank operated solutions), the financial services industry has passed the tipping point in the adoption of mobile money as a means of payment.
While the proliferation of mobile money in Africa is set to grow exponentially and dominate the financial services sector, how is the traditional way of credit scoring based on transactional data (such as bank records) shifting, and are the digital service providers and banks geared to embrace new technologies?
In rapidly growing economies, people need credit and access to finance to improve their quality of lives, buy houses, educate their children and grow their businesses. The question arises: How do you credit score the majority of the population that is unbanked and have no credit record, but are participating informally in the economy using digital methods payment methods and have the means and are willing to pay?
Technology-driven drivers in the adoption of mobile money that is turning the financial services industry on its head include the proliferation of affordable smartphone devices; rising customer expectations (an enhanced experience); multiple mobile money offerings and changing regulations in the region.
Fintech enterprises are partnering with traditional financial companies, such as CredoLab and others, to embrace innovative and disruptive technologies to target new sectors, improve efficiencies, reduce costs, and deliver exceptional customer experience.
Alternative credit scoring
Over the last couple of years, the rise of alternative credit scoring solutions has been led by mostly new technology companies, with some credit bureaus and banks also innovating in this space, but doing so at their own speed and on their own terms.
The main reason that the cutting-edge of alternative credit scoring is driven by new tech players is that the banks and credit bureaus focus on their proprietary scorecard and fine-tuning of traditional data sources. But these traditional players are seeing the merits of partnering with alternative credit scoring providers and leveraging the benefits, which include tapping into new markets of underserved borrowers, improving the accuracy of their credit scoring, and increasing their revenue from loans and other financial instruments.
The banks and other lenders that are using alternative credit scoring solutions from tech partners are experiencing exponential leaps forward. As data sources are more varied than traditional financial information, spanning social media, telco, psychometric, and device data, banks and lenders can gain new customer segments from among the underbanked, such as students and new-to-credit consumers.
The Gini Coefficient, which measures the predictive power of their scorecard, also rises. This is used as a gauge of economic inequality, measuring income distribution among a population. Credit scoring solutions built on anonymised device data can raise the Gini Coefficient by as much as 30%, and the difference in even a single percentage point can save up to US$10 million for every 1 billion in underwritten loans, according to a report from McKinsey. Banks and lenders that are bold enough to turn to alternative credit scoring solutions are rewarded with gains well worth the initial leap.
Unpacking digital credit scoring
But how does smartphone digital credit scoring actually work? In a nutshell, a bank or lender installs a stand-alone or integrated credit scoring app, like CredoLab’s solution, which requires minimal IT set up and is customised to suit their profiling needs. The bank or lender then implements a simple procedure, the first of which is to send an SMS to the prospective customer they wish to score with a unique ID and bank code and a link to the app.
Once the customer downloads the app, and keys in the unique IDs, the app asks for the necessary permissions to access the data on the device. It’s important to note the app only accesses the metadata (data about data) on the device to arrive at the credit scoring. No personal customer data is accessed and no data is moved out of the device.
In a matter of seconds, the score can be viewed by underwriters, accompanied by insights. The algorithm crunches nearly 1, 000, 000 features from opt-in smartphone metadata to find the most predictive behavioural patterns before converting them into credit scores. With CredoLab’s app, metadata is not sourced from a person’s social media network or emails, but from metadata related to their messages, contacts, calendars, downloads, history, emails and storage. With scores being issued within 3 seconds, this is the fastest and most accurate method of creating a bank-grade digital scorecard.
If smartphone metadata is properly acquired with the necessary privacy consent and operation system permission granted, there are no reputational or compliance issues. Risk managers in lending organisations in Africa and other countries are realizing the benefits of smartphone metadata scoring as an alternative or complementary method. This allows lenders to capture the potential of previously unbanked populations and incur lower costs of risk from late payments or defaulted loans. Eventually, this more accurate customer profile leads to lower interest rates and fees for good borrowers.
Ultimately this will transform the way people in the developing world secure access to financing and contribute to breaking the cycle of a “thin credit file” or cycle of poverty, where a borrower has no credit history so he can’t get a loan, and at the same time, he can’t build his credit history because he can’t get a loan or access other financial instruments.
As regulatory compliance and customer privacy become the cornerstone of success in the financial industry, it’s important for industry players to assess customer credit worthiness responsibly in compliance with local data privacy regulations.
Fintech companies that take proactive measures to meet local data security and privacy laws and regulations will be better positioned to build superior compliance transparency, mitigating customer privacy risk and building trust to meet the needs of the consumer.
By Michel Massain, CredoLab Sales for Europe and Africa