To eliminate extreme poverty, many leading global organisations have made financial inclusion a top priority. Business leaders and policymakers have dedicated themselves to improving the quality of life for the world’s poorest, and they believe economic and social progress starts with an inclusive financial system that meets the needs for all income levels.
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As an example, the World Bank Group (WBG) has put forward an aggressive target to reach Universal Financial Access (UFA) by 2020, striving to give all individuals and businesses the access to the financial services they need, regardless of income. It’s an ambitious but noble goal started in 2013, with the target of extending financial services access to 1 billion adults who do not currently have such options.
How alternative credit scores help achieve global financial inclusion?
Financial inclusion is a tough challenge to solve and limited access to credit is a major part of the problem. Alternative credit scoring may well hold the solution to the financial inclusion challenge by using information not utilised by the traditional credit lenders. Data from social media and transactional details can be used to provide lenders with financial tools to better access risk than traditional methods, in a way that is fairer to all.
Here are 5 ways alternative credit scores can help achieve UFA by 2020:
#1. Provide credit to the underbanked
Around 2 billion people in the world are categorised as unbanked. Even more, people are considered underbanked. This means that they have little to no opportunity of securing credit and are therefore unable to access the financial tools necessary to secure a loan to buy a house or save money. Populations in the poorest countries, migrants, refugees and those from low-income families all struggle to get a foot on the lending ladder. Even millennials are often underbanked, too: in countries such as the United Kingdom and the United States age biases in current credit scoring systems mean that many younger people don’t have fair access to credit.
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Alternative credit scoring eases this issue by using alternative sources of data to analyse a candidate’s creditworthiness, helping to kickstart a financially inclusive system for those with no credit history. For example, a lender can use psychometric tests as part of assessing a candidate, which is not reliant on any form of history. Using alternative scoring has the potential to help many people who are underbanked, giving credit to those who currently struggle.
#2. Improve affordability for those with existing credit
For people who are currently able to get or already have a loan, it’s possible that they may not be getting the best deal available. This is particularly apparent for individuals who are new to credit products since credit rating agencies give a lower score to people without an established credit history. People with a short credit history may struggle to get good interest rates that are fair to their personal financial management and lifestyle patterns since it takes such a long time to build up a good rating.
Alternative credit scoring attempts to rectify this issue, by using innovative technology to better assess risk levels in lending, providing the right tools to the right people, at the right time. This enables the lender to deliver financial products in a responsible and sustainable way, which is at the heart of financial inclusion.
#3. Updating credit scores in real time
While many people are able to maintain a long and healthy credit history, many of us do not have a perfect score. In fact, the average score in the UK is just 380 and those who are on a low or below-average income are particularly at risk of having a lower score.
Once you have a bad record on your credit score this can negatively affect your credit rating for several years, sometimes up to 5 years in the future. For example, if a person missed loan repayments 2 years ago, the credit agencies will view this as highly unfavourable, regardless of how much the person’s life has stabilised. Even though this person now has no problem to repay a sizeable loan, this is not something the traditional credit bureaus take into account.
In the short term loan sector, this type of scenario is much more apparent. When an individual takes a short term loan such as a payday or subprime loan then this will stay on their record for many years. Alternative credit scores can help solve the problem in this regard, by providing a more complete assessment that is updated in real-time, and much more reflective of a person’s ability to pay back a loan today.
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#4. Providing standardised, international solutions
In 2016, almost 5 million people moved to OECD countries. As an increasing number of people move around, whether part-time or permanently, we are heading towards a truly globalised world.
Currently, credit scores and the associated history for an individual are limited to the country where that particular person is applying for credit. Although some options for foreign credit analysis is possible (e.g. if you’re looking to buy a home in another country), most people who move to a new country will have to start from scratch. With increasing numbers of global movers, financial services will need to respond to these new challenges.
Alternative credit scoring may be able to provide the solution since the new techniques are much more easily transferable between countries. For example, data from popular social media channels such as Facebook can be used as an alternative credit scoring method, providing data which is universal across all countries who also use the same platform. Opportunities like these will make it much easier for people who have moved to a new country, whether forced or by choice.
Alternative credit scoring also makes it easier for investors to invest in these types of loans since they can diversify their portfolios with international loans and P2P learning. For example, BNI Bank is able to invest in different loans all across Europe, even though they are a small bank based in Portugal.
#5. Removing human biases by utilising FinTech
The growth of Financial Technology (FinTech) has already had a significant impact on the level of financial inclusion and has the opportunity to continue to provide fairer solutions to an individual’s financing needs.
One way that FinTech continues to improve financial inclusion is to use machines and systems where unfair factors like demographic or age are ignored. Algorithms decrease human bias because machines do not have the sociological biases that humans do (although it’s worth noting that they have their own biases). By using machines and algorithms, FinTech is able to create systems that are truly equal to all ages and nationalities.
Similarly to FinTech, Regulatory Technology (RegTech) can also help to remove human biases, by utilizing technology to prove robust frameworks to protect customers. Innovations in both these areas are key to achieving financial inclusion by 2020.
ImageImage Credit: Charles Deluvio
Alternative credit scoring can help bring global financial inclusion
Since 2010, more than 55 countries have made commitments to financial inclusion, and more than 30 have either launched or are developing a national strategy. It’s a tough goal but innovative solutions like alternative credit scoring provide a real way in which this goal can be achieved.
Better tools for assessing an individual’s capacity for risk result in better products that fit the individuals that need them – these are the key beginning steps to ensuring financial inclusion.