September 9, 2016
We are on the verge of massive change. Technological advances in credit assessment are poised to deliver a huge impact by bringing formal, accessible, and affordable credit to hundreds of millions of aspiring middle-class consumers in emerging markets. At the forefront of this change is a burgeoning new field that we’re calling Big Data, Small Credit (BDSC). Omidyar Network, Big Data, Small Credit
They are ‘invisible’ to formal financial institutions and ineligible for formal loans. As a result, those parts of the population are highly vulnerable to economic, political and other instabilities, putting them at a risk of not being able to survive hardships.
Fortunately, the level of technology adoption nowadays creates opportunities for vulnerable groups of population to plug into the formal financial system in a different way. Among the conductors facilitating the access are adoption of mobile technology, mobile data/access to Internet, access to social networks, prepaid cards, mobile biometrics, etc. Alternative sources of data that create a subtle, but a digital footprint of formerly ‘credit invisible’ people, are the most important achievement among the financial inclusion-aimed initiatives.
Source: Omidyar Network
As Omidyar Network explains in its recent paper on ‘Big Data, Small Credit’ (BDSC) concept, digital footprints are helping to spark a new kind of revolution in lending. Indeed, in the past few years, lending has consistently been one of the hottest FinTech segments along with payments. Innovative companies have been turning to unorthodox ways to shed the light on traditionally excluded parts of the population.
Those BDSC companies, as Omidyar Network states, are using varied forms of nontraditional data – from mobile call data records and bill payments to Internet browsing patterns and social media behavior – to create a new way to assess consumer risk, determine the creditworthiness of previously 'invisible' consumers, and consequently offer convenient, quicker, and often cheaper loans to the previously underserved. Their prime offering: unsecured, short-term, small-ticket consumer credit served at a dramatically lower cost than traditional loans.
The estimates by the company suggest that in the world’s six biggest emerging economies (China, Brazil, India, Mexico, Indonesia and Turkey), BDSC has the potential to help between 325 million and 580 million people gain access to formal credit for the first time.
BDSC is not only a part of the ecosystem that makes the most vulnerable parts of the population visible to the formal financial system. Those companies also cut out a way for other services that could significantly improve the quality of life for millions of people.
The conversion of a formerly invisible consumer into a formal customer not only accords dignity and respect but also opens the door to formal savings and insurance services, as well as financial management tools. To pick up where BDSC firms leave, InsurTech will evolve to bring mobile solutions to those with no safety net for health issues. Once the population in developing countries gains a widespread access to credit and builds a sustainable financial health of households, needs will evolve to demand the tools that will allow managing personal funds and perform financial planning.