Alternative Data & Financial Access: The Good, the Bad, and the Ugly

The problem & the opportunity

The World Bank estimates that about 1.7 billion adults remain unbanked globally – without an account at a financial institution or through a mobile money provider. Virtually all these unbanked adults live in the developing world. Indeed, nearly half live in just seven developing economies: Bangladesh, China, India, Indonesia, Mexico, Nigeria, and Pakistan. About 56% of all unbanked adults are women.

The World Bank also found that poorer people account for a disproportionate share of the unbanked – globally, half of the unbanked adults come from the poorest 40% of households within their economy, the other half from the richest 60%. But the pattern varies among economies.

On the bright side, the number of unbanked around the world has been steadily declining. The 2017 Global Findex database shows that 1.2 billion adults have obtained an account since 2011, including 515 million since 2014. Between 2014 and 2017, the share of adults who have an account with a financial institution or through a mobile money service rose globally from 62% to 69%.

One of the problems with extending financial access is the lens through which the formal financial system assesses previously invisible groups of the global population. Lenses vary in different countries, but one is constant – existing frameworks have not been able to effectively expand the addressable market. Financial technologies, however, have a role to play in changing the very framework.

The progress in extending access to the formal financial system to previously invisible groups of the global population is largely attributed to digital financial technologies. Experts believe that smartphones can dramatically reduce the cost of lending because the apps they run generate huge amounts of data – texts, emails, GPS coordinates, social-media posts, retail receipts, and so on – indicating thousands of subtle patterns of behavior that correlate with repayment or default.

The World Bank emphasized that the global spread of mobile phones has facilitated expanding access to financial services to hard-to-reach populations and small businesses at low cost and risk:

• Digital IDs make it easier than ever before to open an account

• Digitization of cash-payments is introducing more people to transaction accounts

• Mobile-based financial services bring convenient access even to remote areas

• Greater availability of customer data allows providers to design digital financial products that better fit the needs of unbanked individuals

Financial access facilitates day-to-day living and helps families and businesses plan for everything from long-term goals to unexpected emergencies. As account holders, people are more likely to use other financial services, such as credit & insurance, to start & expand businesses, invest in education or health, manage risk, and weather financial shocks, which can improve the overall quality of their lives.– The World Bank

The last point in the list of benefits – the greater availability of consumer data – is particularly important. The hallmarks of one’s lifestyle imprinted in continuous data flow are increasingly becoming vital in innovative ways to assess how trustworthy one is. To trust someone with money in the form of credit, or other financial service(s), financial institutions are required to perform an assessment of one’s history with money. Unable to do so for a large group of the global population using existing frameworks leads to a perpetuated exclusion of potentially mutually beneficial relationships with previously invisible individuals, not speaking about unbreakable barriers for building personal prosperity for those individuals.

A limited credit history can create real barriers for consumers looking to access the credit that is often ...