The problem
As Shopaholics, aspiring MBA entrepreneurs or just fortunate citizens of the developed world, we take access to funds and capital as granted. We also understand that our financial behavior and habits are gathered, tracked and analyzed to price our cost of capital. If I will not pay my credit card in full, the next time I’ll need a loan, I will pay more. FICO score has become a dating filtering tool, a question on a job interview or just a social comparison mechanism.
But for more than 1B people around the globe, FICO score is myth. These individuals, concreted in developing countries, do not have access to any formal methodology of credit scoring. This is a growing problem in emerging markets, with emphasis on entrepreneurs and small business owners, where access to finance is a key factor in their financial survival and development. Micro-finance and lending, led by Muhammad Yunus and Grameen Bank, improved dramatically the access to funds in the developing world, but at a price. Micro lending risk premiums are high, with some annual rates rise as high as 100 percent, mainly attributed to the lack of ability to measure risk. At a typical microfinance bank, accessing a loan is often prohibitive due to challenges in measuring risk and approving capital, processes that take time and cost money.
For example, at Microfinancer institute in Uganda, in order to access an asset financing loan equires 25 pages of paper work, multiple branch signatories (who need government ids), guarantors, site visits to the client home and branch, photos of assets to be used as collateral, and takes a minimum of 4 weeks to process. a borrower taking out a 200,000 UGX loan would incur anywhere from 15,000 -20,000 UGX in extra costs to print collateral photos, and pay for the credit officers transport to his or her’s business and home.
The Solution
Increased access and usage of cell phones and the internet has provided a new
set of data inputs to evaluate customer, especially in central and eastern Africa with prevalence of mobile money and usage of social networks.
SmartRank will implement a new algorithm utilizing data inputs based on mobile usage and internet activity to provide credit scores almost instantly for BoP clients, lowering costs for both the client and the bank. Apart from lowering cost of issuing, SmartRank will also enable better risk management which will reduce the average risk premium on current micro-lending interest rates.
Apart from collecting data on mobile usage (# calls, bill payments, mobile money usage, length of calls, types of numbers, engagement with official authorities, etc.) SmartRank will use social media inputs (use of language, spelling, activity, likes, # of friends, etc), GPS data, healthcare information and other public records to provide a comprehensive financial risk analysis of borrowers. All the data would be anonymized and the company will implement the highest standards of privacy and security.
Some solutions, such as First-Access and ScoreLogice, provide partial analysis based on similar data inputs, but none of the existing solutions provide such a robust and comprehensive analysis, focused on emerging markets.
The Pilot
SmartRank will use past data from micro-lenders to demonstrate its ability to predict risk, compering the projected default rates to actual data. This will also be used to enrich the algorithm and improve accuracy. Initial tests with public data form the Lending Club found very interesting correlations – people with less than 300 FB friends and receive less than 2 SMS messages per day were 15% more likely to default. Individuals who do not use capital letters in their application are 7% more likely to default and applicants who write“thank you” in their forms where 23% more likely to repay earlier than the deadline. A trial run on past data showed 28% improvement in risk analysis, which could be translated to a 25% reduction in average interest rates.
Access to live data would truly promote and advance small ventures in the developing world and would demonstrate to the financial industry that FICO scoring belongs to the past. SmartRank is the future.
Sources –
http://www.nytimes.com/2010/04/14/world/14microfinance.html?pagewanted=all