In developing countries, where banks and banking infrastructures are practically nonexistent, financial institutions are figuring out a way to determine the creditworthiness of individuals in those areas.They are looking at how people use their smartphones.
Several startups are working within Kenya, the Philippines, and Indonesia to make the process of lending and borrowing less risky for everyone involved. These are countries where physical banks are few and far between, so the startups are working with potential lenders to develop new ways to assess the risk of potential “lendees”. It’s common that many consumers in these areas have smartphones, even if they do not have bank accounts, so there is a great deal to learn about people through their smartphone usage.
Studies have shown that individuals who send more text messages than they receive are perceived to be a risk, because they are not frugal with their time or money. People who make more phone calls in the evening are considered to be a “good risk” because these people are seemingly more aware of their spending (off-peak hour phone calls cost less money). However, the biggest factor in this smartphone use vs creditworthiness argument is the study of a person’s smartphone payment history. The timeliness of their bill payment is factored in, but there is a heavier observation of other transactions made via smartphone — many people make payments for groceries and personal expenses through their smartphone.
This new determination of credit is transformational in a few ways. For one, it’s creating a space for the masses within these countries, to have access to credit where there has never been “credit” before. This new process is also calling attention to how different the credit systems are around the world. Credit in one country is in most cases useless in other countries because of how different the metrics are. In more established countries, like the United States and The UK, South Africa, and India credit is determined by both positive and negative factors, which aren’t even available or relevant in developing countries. These developing changes in the field of credit are opening up the eyes of international financial institutions; consumer credit may be forced to evolve everywhere to keep up.
To see the article that inspired this blog, click here.