Big data is changing everything from the way we shop to how we travel. Financial technology companies (fintechs) are now following in the footsteps of giants like Amazon, Airbnb and Uber to transform the banking industry in the digital age. Fintech solutions have shown particular promise across emerging markets where big data is used in advanced credit analytics to help determine a borrower’s creditworthiness based on non-traditional indicators like cell phone usage and social media activity.
Many smaller businesses (MSMEs) in Latin America and the Caribbean can’t provide the kind of financial information creditors typically want to see when they consider a loan application. They also represent diverse industries and operational models, making it costly for lenders to collect this information. Financial institutions therefore prefer to err on the side of caution and may simply avoid lending to MSMEs altogether.
This is changing thanks to the emergence of alternative credit scores that take advantage of easy-to-collect, low-cost data points, such as those derived from social media networks and mobile telecommunications. While many MSMEs may not have audited financial statements, almost all have a cell phone, Facebook account or traceable payment records. The idea is that a borrower’s digital footprint provides clues as to whether or not they will repay a loan. Used in combination with traditional credit assessment methods, this approach has proven effective, particularly for borrowers with limited access to credit.
A new study by the Inter-American Investment Corporation (IIC) and Oliver Wyman analyzes how financial institutions can leverage fintech to expand their MSME portfolios. Here are five fintechs making waves with credit analytics:
1. Lenddo calculates credit scores based on data stored in mobile phones, social networks and e-mails. When potential borrowers allow Lenddo to access their information, big data models create a credit score. In addition, Lenddo’s identification product confirms the borrower’s identity when the score is unreliable. It has 15 bank clients in Latin America and the Caribbean and 60 worldwide, helping 500,000 borrowers obtain credit since 2011.
2. FirstAccess generates a credit assessment in less than three minutes based on demographic, geographic, financial and social information derived from mobile phone usage patterns and contract terms. FirstAccess operates primarily in Africa and generates approximately 8,000 scores per month. Typical loan sizes range from $100 to $5,000 but have reached up to $36,000. Its algorithms have been validated for commerce, agriculture, housing and energy finance.
3. AMP Credit leverages electronic payments information to support the processing of small business loan portfolios. Its platform enables lenders to extend unsecured loans to those historically underserved. Designed for different markets, the product is currently used in Asia and the UK.
4. Verde International provides advanced credit assessment models to banks using historical information from credit bureaus as well as alternative sources such as utility bills and macroeconomic data. This complementary information improves the accuracy of traditional scores, increasing credit approval rates and allowing for more accurate risk pricing. Using Verde’s solution, one bank increased its approval rate from 3% to 82%, while maintaining a loss rate of 4.5%. Another was able to approve 70% of clients rejected by traditional analyses.
5. EFL complements traditional credit analyses with 20-minute psychometric tests. EFL’s solution is particularly useful for clients with limited credit histories. When a bank applied the test to 37,000 clients that would have been rejected using traditional scoring methods, 23,000 were approved and 17,000 received a loan, creating a portfolio of $50 million in new loans with a 2.7% delinquency rate after 90 days. The Inter-American Development Bank and the Multilateral Investment Fund have also supported several pilots designed to expand the use of EFL’s psychometric credit scoring tool and improve MSME access to finance in Latin America and the Caribbean.
Alternative credit scores present three key advantages for financial institutions: (1) Expanding their client base by including businesses with limited credit history or collateral; (2) Providing more accurate assessments of clients’ repayment capacities; and (3) Enabling faster assessment of potential clients’ creditworthiness.
Improved accuracy allows for more appropriate financing terms with improved risk management and pricing. Speeding up the approval process leads to greater cumulative transaction volumes. And greater efficiency reduces their cost per unit, making a stronger business case for smaller loans.
For more on the impact of the fintech revolution in Latin America and the Caribbean, click here to download the full report.