When applying for a loan, traditional banks will always check a customer’s credit history, writes Steve Polsky, the chief executive of Juvo. Whether or not the loan is approved relies on the individual’s past performance with credit products. But in cash-based societies in emerging markets, individuals haven’t had the opportunity to access credit or establish a financial identity.
It’s a Catch 22 for the world’s unbanked: you need a credit history but to get a credit history, someone must give you credit without knowing anything about you. However, not for the first time, the mobile phone is well placed to come to the rescue. With a little bit of help from data science.
Money at your fingertips
The mobile phone has delivered connectivity to the unconnected. Bringing wireless communication, email, commerce and the internet to parts of the world that have struggled to deliver a traditional wired infrastructure for a mass consumer audience. Now, in cash-based economies it has the ability to connect the unbanked through mobile money. More than any other innovation or development, the smartphone is delivering financial services to the unbanked. It can reach a population living outside the infrastructure of the traditional banking industry.
Mobile money has successfully expanded access to a range of financial inclusion services for the previously unbanked. At the end of 2016, the GSMA found that there were more than half a billion mobile money accounts registered worldwide – including two-thirds in countries with low or middle-income economies. Nevertheless, the reason it has not been able to unlock credit facilities, so far, for its customer, is because of its reliance on the same credit-scoring techniques that exist in traditional banking.
What is more, while progress has been slow, the unbanked population still need a way of establishing their financial identity to take advantage of these mobile financial services. While most of the unbanked would have never stepped foot in a bank before – they are likely to own a mobile device. In fact, mobile operators are well positioned to tackle this problem. They have access to vast amounts of data about their existing customers which can help them build an identity for each of individual. The only exception is for prepaid subscribers, who are still seen as anonymous. They’re not tied down to regular payments and operators still lack some of the vital information necessary to understand whether they could be trusted with a loan. So how can operators identify these prepaid customers that hold the minimal risk for a loan? With a little bit of data science.
Take a chance
The application of the data science techniques could be the most significant game-changer in terms of financial services within the telecoms industry. Providing prepaid customers with an opportunity of a lifetime, operators can offer minor credit extensions to them and then – based on the subscriber’s payback behaviour – can begin to generate a financial identity, similar to a traditional credit score.
As the individual continues to borrow and pay back their loan – trust is slowly built. Further analysis of the individual’s behaviour can be monitored against subsequent mobile transactions, and rewards or incentive schemes can be added to their data points to generate a greater financial profile. With a financial profile, individuals can receive expanding access to more financial services that are personalised to their exact needs. By offering a bespoke loan, operators can also benefit from improved engagement with their customers and a reduction of churn.
Unlock the potential
Despite the undoubtable successes so far, there is still a long way to go before mobile money can make a real difference to the unbanked. Mobile operators have a unique opportunity to provide millions of people with access to credit, for the first time in their lives all from their device. With penetration expected to reach 5.3 billion by 2020, mobile holds the key to driving financial inclusion. But it’s data science that has the power to unlock this change to reach the vast untapped potential of the unbanked.