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Alternative Credit Scoring: Responding to the Plights of the Unbanked

Ahmed Armaan Siddiqui, Guest Writer |
Update: 2021-09-22 15:10:54
Alternative Credit Scoring: Responding to the Plights of the Unbanked

In a country where a large subset of the population is dismissed in their search for credit, looking into alternative data sources might just be the answer. 

Bangladesh has been the center of attraction to the emerging of fintech with the growth of MFS and on time regulations which attracted most of the banks and its concerns to be part of this initiatives. We belong to a nation of 16 crore individuals and a champion of microcredit with 120+ million MFS wallet holder with a 2.2 Billion daily transaction and the new entrants are still coming having blood baths The sheer amount of data generated- structured and unstructured- remain a powerful tool to be leveraged. However, it is startling that while there exists plenty of opportunities in the cross-section of technology, financial services and digitization, many of the processes that lie here are largely outdated and are in dire need of innovation. Take the traditional credit scoring model, for instance. 

Around 2 billion people in the world are labelled as “unbanked” or “credit invisible”.  Because of little to no financial history, traditional financial institutions immediately deem them as not being credit-worthy without any deliberation. What is alarming is that this is the plight of 67% of the adult population of our country, a significantly larger amount than the global average of 50%. Moreover, the very people who are dismissed as being uncreditworthy are powering the economic engine of the country through microenterprise. It is, after all, responsible for 25% of our country’s total economic output and holds more than 57% of total employment. Despite their remarkable contribution, their lack of financial and transactional data means that they are overlooked in the formal credit market. And therein lies the failure of traditional scoring models and the opportunity for alternative data sources. 

The landscape, as it stands now, pushes the unbanked masses towards the informal credit market, composed mostly of cooperatives and personal lenders. But the high interest rate charged by this segment of the sector, often 10 percent per month, makes them nothing short of loan sharks. Moreover, this unmet and underserved market demand is worth roughly more than 627 million BDT and since the traditional credit scoring process of our country hasn’t been revisited in around 30 years, it is high time that we look into digital intervention to bring about financial inclusion for the 70 million “credit invisible” people in Bangladesh. 

We have come long to the conclusion that digital disruption holds the most potential in the fintech industry. And one of the ways we can leverage it is to help develop alternative scoring models. Needless to say after some ground breaking regulations on agent banking, MFS and interest cap, it is time to establish the regulatory framework on Fintech sector to strike a balance between technological innovations around big data analytics, artificial intelligence with block chain ecosystem and societal stability where alternate credit scoring now a low hanging fruit. The analytics engines have already set up by operators as well as some MFS; with a vast wellspring of information across more than 400 data variables including data and voice usage, top up patterns, location etc., it is important that it is put to use in a way that benefits the underserved masses among us and regulatory can implement regulations on the credit scoring accreditations, IT and information security protocols i;e GDPR and push the boundaries beyond Agent banking and traditional SMEs ensuring digital fulfillments such as alternate CIB, digital forms, online approval and collections hence the administration of the activities of the Peer-to Peer Lending Intermediaries. 

The main characteristics of a good reliable source of alternative data are coverage, specificity, accuracy and timeliness, predictive power and orthogonality. Telecom passes this list with flying colors. With 85 million unique mobile connections, this provides widespread coverage in the country. Moreover, telecom operators are working with data on enormous breadth and depth. For instance, more than 400 million CDRs is generated daily; this is big data in its truest sense.  When aggregated, this data offers unique insight that can be traced over a long period of time, enhancing its predictive capabilities. This is information that can be a powerful additive to traditional bureau data. 

It is also the place where blockchain analytics can be leveraged as an underlying technology. For instance, a blockchain-based encryption engine can ensure that the data analyzed is encrypted and anonymized while the relevant stakeholders receive only the credit score and not any part of customer data. So, even though the customer gets a unified credit score that makes their lives easier, their data is still secure. This is a model that places customer trust and transparency in the center of its operations. 

Globally, this has already been embraced. Swedish telecom company, Telia, has an alternative credit scoring platform that offers straight-through processing for its loan applicants. Experian Boost is an American credit company that uses the FICO 8 scoring model that uses a variety of alternative data including telecom information to strengthen its consumers credit score. A similar solution is also in the works in China as China Telco and Cignifi have already developed their own credit scoring models. KT, Korea’s largest telecom company, also offers alternative credit scoring in the form of K-Telco Score through CRDP, their application and service delivery platform. The 24 hours’ worth of lifestyle insights generated through telecom data is indeed a strong viable source of information to track consumers’ socioeconomic activity and thus, unlock the keys to financial inclusion for the people of the world. The most promising Ant Financials’ MY Bank managed platform on the 3-1-0 system, which users promised registration within 3 minutes, approvals within 1 minute, with zero human intervention is the ultimate destination. 

As a country, Bangladesh too is gradually adapting to digitalization – more people are now using mobile banking than ever. This has paved the path for organizations to come forward with powerful initiatives that can transform the financial industry of our country. Regarding digital credit assessment, local experts claim that Alternative Credit Scoring is more reliable than the traditional credit rating method; a person's creditworthiness can be better assessed than evaluating their income. Now that Bangladesh has been the champion of micro credit ecosystem, with a flying opt in trend to mobile wallet penetrations and new entrants of MFS with clear aspiration it is time to ensure the paradigm shift of the overall traditional scoring into alternate scoring reducing the cost load of the population from 23% to 9% and most importantly ensuring comfort to the ecosystem right from the user, MFIs to regulations to lending partners like Banks. 

Alternate Credit Scoring has a lot of potential to initiate new types of financing in various industries predominantly Retailer & Distributor Financing for FMCGs, TELCOs and SMEs.  It is a matter of great pride that Bangladesh has done phenomenally better than many nations to surmount the challenges during COVID-19. But with alternate credit scoring, the ecosystem can truly flourish by benefitting the enabler segment. Here’s a clearer picture-, when the economy hit a standstill and the lockdown was imposed on the nation, the unbanked masses are the one who are left helpless by harsh economic forces. It is to benefit them that the organizations and corporates along with financial partners and relevant entities like mobile operators, MFIs need to step up into the realm of alternative credit scoring. This will not only allow these significant economic actors to grow but also retain their businesses.

The ultimate vision is to offer Alternate Credit Scoring as a service where telecom operators will be generating credit scores and later these scores will be sold to various Financial Institutions including Banks, NBFIs, MFS providers, Insurance companies and NGOs. Based on these data, various financial institutions will be able to provide credit to these financially excluded people and bring them under the financial inclusion umbrella. Let’s not forget, various other ecosystems shall be benefited as well. A solid ACS mechanism in place will enable us to successfully enter the era of digital inclusion, moving away from the age-old CIB report which mostly comes out empty representing the relatively unbanked population in Bangladesh. The most important elements of IT security and information security are also addressed since the service is available for the opt in intended population whose analytics are also protected by the encryption engine per blockchain technology. The equilibrium of consumer right with the safety of operations are far better than the risk of high interest “benia or Dadon” credit for the sons of the soil of Bangladesh for sure. 

Considering the current economic development of our country and efforts to diminish the ever existing digital and economic divide and create a more business-friendly financial sector, it is high time to rebuild the economy in a sustainable way and the only way to do so is to seek help from advanced technology and develop unique initiatives such as credit rating from alternative data using AI and machine learning.

As per the status quo, the credit rating engines are getting ready with more than 18 month, Financial Institutions including Banks, NBFIs, MFS providers, Insurance companies and NGOs need to step forward to embrace this new concept of utilization of alternative data for analyzing the credit-worthiness. By adopting proper policies and developing the right ecosystem, a level playing ground can be created for all involved parties-MFIs, banks, telecom operators, credit rating agencies and others. Bangladesh has every potential to enter into the next generation financial sector and ACS offers a remarkable opportunity to do so through harnessing the strength of customers’ telco data and their digital footprint. Media also has a large role to play as an enabler creating necessary awareness among customers, users and relevant stakeholders regarding the innovative solution that is already underway. In this era of new normal where the people are facing uncertainty on survival but having the spirit to turn around the fate with microcredit through alternate credit scoring shall be the critical pillar of economic revolution. Lets aim for our own 3-1-0 journey; let’s work towards great days ahead.  

Writer: Ahmed Armaan Siddiqui, A Transformational Leader / Lateral Thinker / Strategic Visionary / Elite Communicator / Fintech Specialist/ Change Agent serving new core business of TELCO and TOWERCO for more than 20 years. 

BDST: 1510 HRS, SEP 22, 2021

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