People around the world are underbanked, or even unbanked, for a variety of reasons – from a lack of access to a lack of awareness or demand.
When compared to saving and payment solutions, access to borrowing is generally more limited. People in developing countries are often caught in a vicious cycle – as they have never borrowed money formally, it is difficult for potential lenders to assess the associated risk, thus further preventing their ability to access loans.
Microlenders improving their processes
That being said, the unbanked have not been completely without options. For the last 50 years or so, microlending has been trying to close the borrowing gap. Microfinance institutions (MFIs) such as Grameen Bank (focused on Bangladesh), Opportunity International (a UK based charity focused on women, children and farmers in developing countries) and Accion (a US based non-profit organisation working in over 20 countries) have been offering microloans to rural and unbanked individuals and entrepreneurs around the world. These industry household names have, however, used technology to a very limited extent and the cost and time required to manually evaluate and process loans had hindered the sector.
Recent technological advancements have allowed microlenders to improve their processes, from collecting information digitally, through to automated risk assessment and replacing loan disbursement in cash. One successful initiative has been developed in Tunisia, where Taysir Microfinance pays out its loans into a prepaid card issued by the national postal service, enabling borrowers to make purchases and withdraw cash. Borrowers are also able to top up the card at a post office, for instance, to pay back the loan amount.
Some microlenders have gone further than this; Axis Bank, for example, uses geotagging and digital KYC (Know Your Customer) to provide joint liability loans to women in India. Thus, by harnessing technology, traditional providers continue to extend their reach to financially include previously underserved and excluded segments.
An alternative approach to risk assessment
Technological advancements have also enabled the rise of new, more innovative concepts. Although technology is used in different ways for a variety of purposes in the lending space, the biggest leap has been made in the area of credit scoring.
Today FinTechs around the world use alternative methods to evaluate the risk of lending. Similar to banks, FinTechs typically start assessing potential borrowers by evaluating readily available consumer data from credit bureaus, and combining this information with other sources, including credit card usage and online banking details. However, although they use similar sources to traditional lenders, FinTechs are typically more agile in harnessing technology to analyse available data to streamline the risk assessment process.
Lenddo, a Singapore-based start-up, uses social media and smartphone records to provide credit scoring and verification to individuals in Latin America and South-East Asia, to make it easier for people with a lack of financial history to apply for a loan with a third party. Similarly, Tala Mobile, a US-based start-up which offers microloans in the Philippines, Kenya and Tanzania, analyses an individual’s phone and online activity to decide whether and at what rate to offer a loan. Credit Karma, a US-based FinTech, provides free credit scores to its 60 million members, as well as offering personal, student and auto loans. However, even the vast Credit Karma community is dwarfed by Sesame Credit, the social credit scoring system of Alibaba, the Chinese e-commerce giant. Sesame Credit uses data from the Alibaba network counting over 400 million members, which includes the world’s largest e-commerce platform as well as social media sites, to compile individual credit scores used by lenders, among other service providers, in China. These innovative solutions have been successful in using different types of data, often specific to the region and/or segment they serve, to provide feasible credit scoring and lending solutions to the underbanked around the world.
Peer-to-peer – the future of microlending?
Alternative credit scoring is also widely used by P2P (Peer-to-Peer) lenders. The global P2P lending market has been estimated to grow at a CAGR of over 50% during the five year period between 2016 and 2020. Unlike in the case of traditional consumer lending, where banks provide the funds, P2P lenders only facilitate the lending process, with the money moving directly from the lender to the borrower; this way, individuals with a higher risk appetite enable borrowers-in-need, often denied by banks, to obtain the necessary funds.
Although in the case of the biggest P2P lenders, such as Lending Club, Prosper or SoFi, the majority of funds are lent and borrowed by people in developed countries, the concept is also gaining popularity in developing countries. Some P2P lending solutions are designed specifically for the unbanked; Zidisha is an online microlending community that connects lenders from 160 countries with borrowers in Africa. Following a similar concept, Oportun, a US-based P2P lender provides personal loans to the Hispanic population within the country.
Contrary to most developed countries, where P2P lenders typically operate exclusively online, P2P lenders in some Asian countries typically have both an online and offline presence due to a lack of available data for credit scoring, low internet usage and regulatory hurdles. Nevertheless, online P2P lenders relying solely on online data are also emerging in the region; FinTechs in China (Lufax, Dianrong, Yirendai, Paipaidai) and India (Faircent, LendenClub, i2ifunding) are underwriting loans worth billions of dollars each year. By connecting lenders and borrowers, P2P platforms promote a financially inclusive future, often encompassing segments that institutional lenders are unable or unwilling to serve.
The ever-increasing amount and variety of data, based on individuals’ mobile, online and social media presence enables the development of innovative solutions to better measure lending risk and streamline the lending process, with mobile apps and improved internet access allowing the underbanked better access to much needed funds.
Regardless of whether the funds are provided by a bank, a traditional microlender, a FinTech or an individual, technological advancements allow wider financial inclusion, enabling the underbanked to not only save and pay, but to borrow as well. With technology advancing at ever faster speeds, we expect new, innovative solutions to emerge, helping the underserved populations to become more financially included.
With this post, we conclude the first part of our Financial Inclusion series focused on how FinTech is improving the financial inclusion of individuals globally. Next up, we’ll focus on how underserved SMEs can benefit from the FinTech revolution.
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