For all the signs of financial progress, banking apps, alternate payment methods and investment options, a surprising 1.7 billion of the world’s adult population continue to remain unbanked. This population overlaps significantly with the lower-income population in most economies, including developing economies such as China and India, with women being a majority within the group. A majority of the unbanked also have primary education or less and are more likely to be out of the documented labor force. The barriers vary from lack of enough money to need an account to the lack of documentation to qualify for one. This is one of the biggest constraints to the survival, growth, and productivity.
And yet, it is this very same unbanked population that stands to benefit most from financial inclusion. With access to proper banking channels and platforms, small and medium-sized business (SMB) owners can access new markets, daily wage workers can benefit from greater pay parity and low-income households can build a financial safety net through small but regular savings.
For banks and financial institutions, the unbanked population continues to represent the largest growth opportunity and also a chance to positively influence the lives of millions by offering them economic parity. If developing economies are to prosper in a digital world, banks need an alternative way of assessing small businesses – and the answer may lie in that very digital world.
With greater regulation and the constant pressure to minimize risk and exposure in the aftermath of the financial crisis, is banking to this population possible?
How can banks provide services to individuals and enterprises with no credit history? How can banks and financial services grow into markets where traditional banking models are not prevalent? And why is this expansion of financial services critical to the future of banks as well as the communities in which they operate?
Bridging the information gap
The trust that underpins the banking, financial services and insurance industries rely on accurate information. But until now, only certain sources of information have been taken into account to build the profiles of entities institutions conduct business with. This has resulted in a large percentage of the population including young citizens, immigrants, freelancers and others who have a relatively lean credit history being locked out of traditional credit models and correspondingly, the economic growth associated with those.
As credit agency Experian points out, “an ‘unscoreable’ individual is not necessarily a high credit risk – rather they are an unknown credit risk. Many of these individuals pay rent on time and in full each month and could be great candidates for traditional credit.”
Beyond traditional credit and risk profiles
Increasing financial inclusion is not just ethically desirable. It is a vital component in driving economic growth and, of course, it delivers social parity. Colombia’s biggest bank, Bancolombia, has declared that its mission is to increase financial inclusion by being a more compassionate bank.
Almost one in ten Colombians now live abroad. Many of those left behind depends on remittances. By forging links with remittance companies, the bank enabled 200,000 citizens to receive international payments directly into a Bancolombia account each month.
The next phase was to reach out to Colombians living abroad, opening almost 100,000 new deposit accounts for expatriates. This, in turn, led to the granting of 9,000 transnational mortgages which enabled expat Colombians to buy homes for their relatives living in Colombia.
Bancolombia demonstrated that remittance history could be a good indicator of creditworthiness and now routinely includes remittances when calculating customers’ total income. The World Bank estimates that globally, migrant workers send more than $600 billion a year to their families.
Another approach to inclusion is to use non-financial digital data to gauge creditworthiness and shape new products.
A lack of telecom infrastructure in the developing world means the web largely skipped the fixed-line stage and has gone straight to mobile. GSMA Intelligence says five billion people have access to a mobile phone. That ubiquity of mobile phones means most people have an online profile.
Globally, the amount of digital data doubles every two years and by next year 60% of it will come from developing economies. So how can banks leverage this wealth of information?
Here are some of the novel ways alternative data can be used to help make better lending decisions:
Consumer permissioned social media mining can be used to build profiles of customers. For example, as TCS pointed out in their White Paper Crossing the Credit Divide with Alternative Data, if a defaulting customer is part of a prospective borrower’s social network, then a bank might assume they share traits and behaviors with their online contacts.
Psychometric data from online survey responses can, as the TCS White Paper points out, be used to get a fully rounded picture of potential customers including measuring intelligence, business skills, behavioral patterns, drive, motivation, and beliefs.
Rental payments, asset ownership, and utility bill analysis can give insights into creditworthiness. Regular, on-time payments indicate a user’s sense of personal responsibility, which can drive up their credit score.
No Longer Just an Alternative
Proponents say that by applying analytical AI tools across alternative data, banks will gain a much better picture of the need for their services and help them develop new lending products tailored to customers’ needs.
For example, Bancolombia has started offering life insurance and accident cover to those using its remittance services. It has also set up a payment system for rural farmers that lets companies buy carbon credits, with the money going to farmers who conserve forests rather than cutting them down.
Real-time verifiable digital data will also allow customers in the developed world to overcome shortcomings in credit rating information. The US Consumer Financial Protection Bureau says it receives almost 2,000 complaints a month about inaccurate data held by the two leading consumer credit rating agencies. Young people – who are more likely to rent and move jobs – are among those who will benefit most from a system that can keep up with fast-changing circumstances.
The use of alternative data can no longer be considered just an “alternative”. So, it is imperative that it’s incorporated into banks’ customer strategies.
The digital revolution has produced a wealth of untapped alternative data that can bridge this information gap.
Banking enterprises and their clients can benefit in several ways:
1. Robust credit history – lenders can build up a more accurate picture of a potential borrower’s risk profile.
2. Comprehensive financial coverage and advice – by understanding more about a client’s financial needs, enterprises can offer more relevant and bespoke products.
3. Customized products and services – analysis of a client’s non-financial activities will point the way to new tailored products.
4. Greater financial inclusion – people and businesses that were formerly “invisible” can be identified and products designed to suit them.
For banking and financial institutions, the opportunity is clear. The leaders that are able to harness alternate data will be the ones creating a brighter future, not just for their enterprise, but through driving the next wave of economic empowerment.
About the author(s)
Business & Technology Services
TCS’ Business and Technology Services organization combines the power of business excellence with digital innovations to help enterprises and leaders be purpose-driven and performance-oriented, making the shift from shareholder value to stakeholder value. By harnessing the abundance of data, talent, connectivity and capital, B&TS helps leading companies around the world build ecosystems that fuel growth and innovation, foster collaboration and engagement across ecosystems, improve health, safety, and well-being, enabling empowerment and inclusivity, and driving sustainability and positive environmental impact.