Alternative credit scoring for fintech

Ahmed Armaan Siddiqui | Saturday, 30 October 2021

Bangladesh has been at the centre of attraction for the emergence of fintech with the growing mobile financial services (MFS) and on-time regulations which attracted most of the banks and its concerns to be part of this initiative. We belong to a nation of 160 million people and a champion of microcredit with 120+ million MFS wallet holders with 2.2 billion daily transactions and the new entrants are still coming. The sheer amount of data generated- structured and unstructured- remains a powerful tool to be leveraged. However, it is startling to note that while there exists plenty of opportunities in the cross-section of technology, financial services and digitisation, many of the processes that lie here are largely outdated and are in dire need of innovation. Take the traditional credit scoring model, for instance.
Around two billion people in the world are labelled as "unbanked" or "credit invisible". Because of little to no financial history, traditional financial institutions immediately deem them as not being credit-worthy without any deliberation. What is alarming is that this is the plight of 67 per cent of the adult population of our country, a significantly larger amount than the global average of 50 per cent. Moreover, the very people who are dismissed as being uncreditworthy are powering the economic engine of the country through microenterprise. It is, after all, responsible for 25 per cent of our country's total economic output and holds more than 57 per cent of total employment. Despite their remarkable contribution, their lack of financial and transactional data means that they are overlooked in the formal credit market. And therein lies the failure of traditional scoring models and the opportunity for alternative data sources.
The landscape, as it stands now, pushes the unbanked masses towards the informal credit market, composed mostly of cooperatives and personal lenders. But the high interest rate charged by this segment of the sector, often 10 per cent per month, makes them nothing short of loan sharks. Moreover, this unmet and underserved market demand is worth roughly more than Tk 627 million and since the traditional credit scoring process of our country hasn't been revisited in around 30 years, it is high time that we look into digital intervention to bring about financial inclusion for the 70 million "credit invisible" people in Bangladesh.
We have come to the conclusion that digital disruption holds the most potential in the fintech industry. And one of the ways we can leverage it is to help develop alternative scoring models. Needless to say that after some ground-breaking regulations on agent banking, MFS and interest cap, it is time to establish a regulatory framework on the fintech sector to strike a balance between technological innovations around big data analytics, artificial intelligence with block chain ecosystem and societal stability where alternate credit scoring is now a low hanging fruit. The analytics engines have already been set up by operators as well as some MFS providers; with a vast wellspring of information across more than 400 data variables including data and voice usage, top-up patterns, location, etc. It is important that it is put to use in a way that benefits the underserved masses among us and the regulator can implement regulations on the credit scoring accreditations, IT and information security protocols, General Data Protection Regulation (GDPR) and push the boundaries beyond agent banking and traditional SMEs ensuring digital fulfillments such as alternate CIB, digital forms, online approval and collections, hence the administration of the activities of the Peer-to-Peer Lending Intermediaries.
The main characteristics of a good reliable source of alternative data are coverage, specificity, accuracy and timeliness, predictive power and orthogonality. Telecom passes this list with flying colours. With 85 million unique mobile connections, this provides widespread coverage in the country. Moreover, telecom operators are working with data on enormous breadth and depth. For instance, more than 400 million CDRs are generated daily; this is the big data in its truest sense. When aggregated, the data offer a unique insight that can be traced over a long period of time, enhancing its predictive capabilities. This is information that can be a powerful additive to traditional bureau data.
It is also the place where blockchain analytics can be leveraged as an underlying technology. For instance, a blockchain-based encryption engine can ensure that the data analyzed is encrypted and anonymized while the relevant stakeholders receive only the credit score and not any part of customer data. So, even though the customer gets a unified credit score that makes their lives easier, their data are still secure. This is a model that places customer trust and transparency at the centre of its operations.
As per the status quo, the credit rating engines are getting ready with more than 18 months. Financial institutions including banks, NBFIs, MFS providers, insurance companies and NGOs need to step forward to embrace this new concept of utilisation of alternative data for analysing the credit-worthiness. By adopting proper policies and developing the right ecosystem, a level-playing ground can be created for all involved parties-MFIs, banks, telecom operators, credit rating agencies and others. Bangladesh has every potential to enter into the next generation financial sector and ACS offers a remarkable opportunity to do so through harnessing the strength of customers' telco data and their digital footprint. Media also has a big role to play as an enabler creating necessary awareness among customers, users and relevant stakeholders regarding the innovative solution that is already underway. In this era of new normal the people are facing uncertainty over survival but having the spirit to turn around the fate with microcredit through alternate credit scoring which should be the critical pillar of economic revolution.

The writer is a fintech specialist
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