Industry
Banking
Banking on purpose-led ecosystems
Highlights
- Rising globalization has fuelled immigration, with migrants contributing significantly to the economic growth of their adopted country.
- Despite financial inclusion being in the spotlight, the migrant community faces severe challenges in accessing financial services, especially credit, due to the lack of a credit history.
- Embracing the concept of a global credit score can help overcome this challenge. This will involve normalizing credit histories and scores from migrants’ home countries to arrive at a global credit score that can be used to extend financial services to this currently underserved segment.
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Immigrant banking – a huge opportunity
Immigration offers a multi-billion-dollar opportunity for the financial services industry, most of which is currently untapped.
A UN Department of Economic and Social Affairs (UNDESA) report estimated the number of people living outside their country of origin at 281 million in 2020. This large group often experiences problems in accessing financial services, a key requirement for starting a new life in their adopted country. Accessing credit is especially difficult in the absence of credit history, as unlike educational and professional profiles, immigrants cannot carry their financial histories with them.
The immigrant segment offers huge potential to financial institutions, capitalizing on which will require them to leverage immigrants’ financial and credit histories from their home countries. We believe that embracing the concept of global credit history can help. We present a methodology to normalize credit histories and scores from different countries across the globe and arrive at a global credit score for immigrants. This will allow financial services providers to offer credit and other financial services to this underserved segment.
Financial inclusion in the spotlight
A key enabler for most of the UN’s Sustainable Development Goals (SDGs), financial inclusion has become a key priority for countries the world over.
Even as nations strive to extend banking services to traditionally underserved segments, one large demographic that has failed to fully benefit from such initiatives is the global immigrant population. With rising globalization, the number of skilled and professionally qualified migrants such as doctors, engineers, consultants, technology specialists, and digital nomads has grown significantly. Despite being notable contributors to the economic growth of their adopted country, skilled migrants hit a roadblock in accessing crucial personal or business financial services, especially credit, needed to start afresh in a new country. This can be attributed mainly to the absence of a credit history in the adopted country.
Take the case of experienced Indian professionals migrating to pursue higher education in US universities. Most of them take a sizeable education loan from an Indian financial institution, based on their local credit history. Such a loan would be at rates of interest prevailing in India, which typically tend to be higher than those in the US. Moreover, they are exposed to currency risk as they would have borrowed in Indian rupees, but would have to repay using income earned in US dollars. Were they to obtain refinancing in the US, they could alleviate both these risks and repay their loan in the home country. However, most immigrants are unable to access financial assistance at competitive rates, as they do not have credit histories in the US. Financial institutions that serve such borrowers lend at higher rates of interest and demand significant collateral as security, thus nullifying any potential benefits.
Another category that is adversely affected by the absence of a credit history is immigrant entrepreneurs. They often struggle to obtain debt financing and must rely on equity funding. Were banks to consider credit reports from their home countries, they could provide debt funding at better terms, as opposed to stipulating arduous covenants and collateral requirements.
The creditworthiness of many such borrowers is unquestionable given steady incomes and stellar credit profiles in their home countries. However, they cannot benefit from this in their adopted countries in the absence of common baselines and lack of uniformity in credit reports across countries. For instance, normalizing a credit score, say a CIBIL score in India, and comparing it with one in another country, say a FICO score in the US, will pose challenges. In the absence of a globally acceptable credit score or global credit score, immigrants are forced to rebuild their credit histories from scratch. The impact is akin to rebuilding credit histories after a major default event.
Transferring credit history
We see a solution to the problem in embracing the concept of a global credit score.
This will entail the transfer of credit histories from immigrants’ home countries to their adopted countries. With a global credit score, financial institutions in any country can access, and use, immigrants’ credit history from their home country. A win-win situation for both banks and immigrants, it will allow banks to tap into this largely underserved segment by tailoring products to suit their unique needs while also promoting the larger social goal of financial inclusion.
Credit histories can also be leveraged to avail other services such as telecom plans and utility connections, as well as for performing employment checks for recent migrants, especially in skilled migration programs, where people migrate without active employment. Access to credit history of the home country can also improve housing facilities for immigrants as it will allow landlords to screen migrant tenants by verifying their antecedents.
Ascertaining the credit history of immigrants from their home countries can also help banks in the adopted country improve fraud detection. For example, if the credit history reveals that an immigrant has committed fraud in his or her home country or is a loan defaulter, then the financial institution can initiate more rigorous measures to verify their antecedents before onboarding. Additionally, international credit reports of businesses can be utilized by lenders to collaborate with and serve overseas suppliers and customers. This would ease international business transactions and reduce the risk for financial institutions. Subsequently, this platform can also be utilized to automate onboarding, credit underwriting, and decision-making for global customers.
Making it work
A global credit score will allow immigrants to avail of equal opportunities in their adopted countries.
To successfully implement this model across multiple jurisdictions, regulators and central banks of both home and adopted countries will need to collaborate. Implementation at scale is not viable to be taken up on a piecemeal basis by individual banks. It needs a push at various multi-lateral fora such as central bank and financial regulatory forums and free trade forums where home countries can negotiate better financial access for their emigrants. In addition, government-to-government discussions will be needed; for example, governments of countries with a large number of outbound migrants can collaborate with the governments of adopted countries.
However, this does not mean that there are no avenues for an individual bank to implement a global credit score. There are two models available to financial institutions:
- Individual banks can tie up with major credit bureaus in the countries from which their potential borrowers originate. Some major migrant corridors are Mexico to US, India to US, India to UK, China to Europe, Portugal to Brazil, and so on.
- Global credit bureaus with operations in multiple countries can partner with one another to enable secure data sharing. Banks and financial institutions can then leverage the data available from these partnerships to enable a transfer of credit history, thereby improving credit decisions. This model can open large possibilities for bureaus that operate globally.
The process starts at the portal of a financial service provider where a customer seeks financial assistance (see Figure 1). To ensure compliance with privacy regulations, this will need to be a consumer-permissioned model, with data being transmitted only after receiving explicit customer consent limited in terms of duration and access rights. We visualize the process as below:
- The customer applies for a loan and indicates that he or she would like to source credit history and score data from their home country (see Figure 1).
- The customer verifies his or her identity and credentials to their home country.
- The global credit score engine seeks consent from the customer to pull their financial history and data from the home country, which is enabled by integrating an application programming interface (API) with the home country’s credit bureau.
- The customer’s credit score from the home country is converted into equivalent scores of the adopted country. Credit bureaus of different countries assign distinct weightages for various factors such as payment history, debt burden, types of loans, recent loan searches, and so on. In India, the most common bureau is the Credit Information Bureau (India) Ltd (CIBIL) which assigns customers credit scores ranging from 0 to 900, where a score above 650 is considered good. Likewise, the most prominent credit bureaus in the US are Equifax and Experian, which assign scores ranging from 300 to 850. Similarly, UK credit bureaus such as Transunion, Equifax, and Experian assign scores ranging from 0 to 999.
- The credit score from the home country is translated into the adopted country’s score or band by mapping similar credit characteristics such as likelihood of repayment, indebtedness, credit maturity, and so on.
- Based on the translated credit score, the bank decides on the credit amount, pricing and other terms and conditions.
Figure 1: A conceptual representation of how to arrive at a global credit score
Financial institutions must move quickly to capture this customer segment—winning customers at an early stage when they are still building their credit profiles can open bigger opportunities in the future as they grow their income or business. Financial institutions that act quickly will gain a lead, leaving their peers behind.
