How Disruptive Credit Scoring in the Emerging Markets Can Provide Formal Loans to Millions
We are excited to share our new report “Big Data, Small Credit: The Digital Revolution and Its Impact on Emerging Market Consumers”, which focuses on the promise of a rapidly-emerging cohort of pioneering firms that are disrupting traditional risk assessment techniques in the emerging markets.
These new businesses stand at the intersection of three significant global trends:
- Unprecedented digital and mobile access from the “supercomputers” in our pockets;
Rapidly escalating processing power that matches smart algorithms to huge digital data streams; and
- Growing demand for access to formal financial services by billions of aspiring middle-class consumers who remain underserved because they are “invisible” to lenders.
But these emerging-market consumers may not remain “invisible” for long. Innovative firms are using highly predictive algorithms to generate a new kind of credit score—one based not on previous credit performance but on consumers’ growing digital footprints. In other words, they mine nontraditional data—from mobile phone usage data and web browsing histories to social media activity—to determine the creditworthiness of otherwise “invisible” consumers. Their prime offering: unsecured, short-term, small-ticket credit served at a dramatically lower cost than traditional loans.
For financial services providers, this is a new approach to knowing your customer—and one with the potential to revolutionize how and why they lend. In the world’s six biggest emerging economies alone—China, Brazil, India, Mexico, Indonesia, and Turkey—what we are calling “Big Data, Small Credit” (BDSC) services have the potential to help between 325 million and 580 million people gain access to formal credit for the first time. By any measure, the opportunity is enormous.
The voice of the consumer
While our report gives an overview of the BDSC landscape, and both its opportunities and challenges, the bulk of the report focuses not on the firms themselves but on the consumers who are already finding great value in their offerings. Very little has been captured about the individuals who use these services. To learn more about who these consumers are—their motivations, behaviors, and preferences—Omidyar Network commissioned in-depth interviews with more than 300 “early adopters” in Kenya and Colombia. We share many of the insights gleaned from that work in our report.
In general, these early adopters are younger, more educated, stably employed, and technologically savvy than the average Kenyan or Colombian. But borrowing remains an important part of their financial lives—done either to manage financial volatility or to invest in the future. And compared to the mostly informal sources at their disposal, they find BDSC services compelling: they are convenient, easy, and fairly priced.
Because BDSC services involve the exchange of personal data for services, we asked these early adopters about their views on private information. Not only are the early adopters able to sophisticatedly rank different types of private data on a spectrum from “more” to “less” private, but most (about 7 in 10) are currently willing to trade data they consider private in exchange for formal, convenient, unsecured credit. In addition, they raised concerns about the security and integrity of their data, articulated strong views about what would constitute a violation of their trust, and provided ideas about how BDSC firms might work to enhance that trust.
Listening to consumers as we architect this new industry is important—and they are clearly telling us that they care about trust, transparency, and data standards. Based on these and other consumer insights, we also lay out in the report what key stakeholders—innovators, financial service providers, data “owners”, and policymakers—can do to build a trust-enhancing system that serves both businesses and consumers.
Investing in BDSC’s Future
At Omidyar Network, we support and invest in entrepreneurs and innovative ideas that hold the promise to change the global landscape of financial inclusion. While the BDSC field is still nascent, we strongly believe that the firms operating in this space are already beginning to live up to that promise. By radically altering the way that financial risk is assessed in emerging markets, they are disrupting the high costs normally associated with evaluating the creditworthiness of “thin file” or “no file” consumers. This, in turn, is giving millions of aspiring middle-class consumers access to formal financial services—and the opportunity to build their assets and plan for a better future.
We have already invested in this space, in pioneer firms like Cignifi, which develops risk scores for emerging-market consumers using their mobile phone usage data. To date, the company has scored more than 150 million consumers in 13 countries, decreasing acquisition costs by 40 percent. Another marquee investee, Lenddo, has created a risk management algorithm that uses potential customers’ social media activity—including Facebook, Twitter, and Linkedin—to prove their identity and creditworthiness.
These are just two examples of the dozens of BDSC firms that are helping to crack open the world of financial services so that billions more people can gain access to affordable credit. We believe that these firms, and the inclusive services they offer, are among the most exciting developments in financial services today. However, much remains to be done to fully deliver on the promise of this rapidly emerging and potentially transformative field. We hope that you read our report, and that it will inspire you to join us in encouraging and supporting the growth of “Big Data, Small Credit”—to the benefit of millions.
The full report can be downloaded at: www.omidyar.com/spotlight/what-big-data-small-credit