How Alternative Data Can Promote Financial Inclusion
Last week, leaders from around the gathered in Davos, Switzerland for the 46th World Economic Forum (WEF) Annual Meeting.
There, 40 heads of state and 2,500 business leaders discussed ongoing challenges, such as security and climate change, and ‘mastering’ the “Fourth Industrial Revolution,” which refers to the “fusion of technologies across the physical, digital, and biological worlds which is creating entirely new capabilities and dramatic impacts on political, social and economic systems,” writes WEF Founder and Executive Chairman Professor Klaus Schwab.
One other challenge that requires the world’s attention and action is financial exclusion. Around the world, 2 billion people live in poverty and struggle without access to basic financial services like checking, savings, insurance, or credit. This problem affects individual families and businesses, as well as entire economies.
But it’s a problem that we can solve. The “fusion” of different technologies Professor Schwab mentioned presents us with exciting opportunities to address that problem.
Just look at credit. Typically, receiving credit depends on having a detailed financial history. Lenders either need to see that an individual or business has managed to take on and repay debt, or that they have collateral on hand before deciding to lend any money.
In most instances, that’s just good due diligence – creditors need some confidence that the money that they lend out will be returned to them. Unfortunately, because that model is based on and values detailed, formal financial history, it excludes the billions of people who lack access to formal financial services.
It’s not that the financially excluded have bad credit history – instead, they have no history whatsoever. Every cash transaction that they make is invisible to possible creditors, and without a checking or savings account, it’s impossible for lenders to see what type of collateral they might have.
Credit provides all of us with some flexibility, either to seize an opportunity or manage a shock. Without credit, it’s difficult to launch or expand a business, hire new employees, or afford tuition.
For too long, two billion people have lived without that flexibility – they’ve had to struggle using whatever they had at hand to make due. But things are starting to change.
Today, we’re seeing how mobile technology, cell phones, social media, and big data are combining to form detailed user histories that creditors can use to assess and lend to clients – even to clients without any formal financial history.
The media is starting to explore these technological intersections: in October 2015, Ben McLannahan warned that “Being ‘wasted’ on Facebook may damage your credit score” in The Financial Times. The next month, Sangwon Yoon reported that “Lots of Contacts in Your Mobile Phone May Get You Loans” for Bloomberg Business. Later that month, Alina Selyukh asked “Could Your Social Media Footprint Step on Your Credit History?” in NPR.
Setting aside tone, it’s clear that – for good or bad – what applicants do online can affect how creditors see them. In the developing world, what applicants do online can affect whether creditors see them at all.
The fusion of social media, big data, and mobile phones to produce “alternative data” – information that can predict a borrower’s behavior typically overlooked by traditional lenders – is an exciting trend for those of us working to promote financial inclusion. It can finally make the invisible visible. And it’s using mobile technology as a starting point: although 2 billion people lack access to financial services, 85% of the world’s population – or roughly 4 billion people – have mobile phones that are constantly transmitting, processing, and receiving data.
At Accion, we’ve invested in a variety of financial technology startups working to examine that data and use it to extend loans to businesses and enterprises. One of those startups is Tiaxa, which is quickly becoming the most successful big data company serving the poor.
In the developing world, instead of paying a monthly bill, cell phone users buy certain amounts of air time upfront and use it to talk on the phone, text, and surf the web. When they’re out of air time, they can’t use their phones.
Unless if they are working with Tiaxa: if a user’s phone runs out of credit in the middle of the call, Tiaxa can decide in that instant whether to extend them a small amount of credit – a nanoloan – to cover the cost of their call.
It’s not much money, but it’s essentially the beginnings of personal credit over the mobile phone. Tiaxa can make these decisions in real-time because its algorithms assess phone usage, which, in turn, reveal how we live our lives. By tracking users against 70 different variables every day – such as if they regularly top-up their air time, if they can read and write text messages, if they travel frequently and use more than one cell tower – Tiaxa can use alternative data to construct histories that they use to decide who is or isn’t a good bet. The startup is now starting expanding their service, using that information to make bigger working capital loans.
There’s also Kopo Kopo, based in Nairobi, the world’s first mobile money merchant acquisition platform, which makes it easier for small merchants to accept mobile money from customers to purchase goods and services as well as to get cash advance for business purposes; Konfio an online lending platform that uses innovative credit algorithms and alternative data analysis to help small businesses in Mexico who do not have access to credit obtain affordable working capital loans; and Tienda Pago, which works with consumer goods manufacturers like SABMiller to provide shopkeepers with short-term working capital loans that they need to buy more inventory and increase sales, all while building a formal credit history.
This fusion of mobile phones, social media, big data, and finance is growing fast and shows tremendous potential. While ‘disruptive’ technologies usually get all the headlines, it’s really instances of convergence when breakthroughs happen – when we find ways to graft different trends and ideas together and make something bigger than the sum of its parts.
That’s something Accion has always pushed itself to do – to take the best trends in finance, technology, philanthropy, impact investment and government and bend them all toward financial inclusion. We hope that the attendees in Davos recognize the opportunity they have to help us fuse new ideas together and bring financial services to those who need them most.
For more coverage on Davos and its implications for financial inclusion, see the MasterCard Center for Inclusive Growth, which published a blog post by Elisabeth Rhyne, Managing Director of the Center for Financial Inclusion at Accion about the Basel Committee’s new guidance for the banking industry.