The traditional Lending model:
During the assessment of an applicant’s financial reliability, lenders globally have traditionally depended upon a limited range of data sources. Lenders generally prefer thick credit files. The thicker the file, the more the information about the applicant’s recent bank account and payment history and his/her borrowing and repayment activity- greater are the chances of their loans getting sanctioned.
Undoubtedly these established credit scoring systems work pretty well for the more financially active and well-off consumers. However, large segments of the population globally are unable to prove their creditworthiness through these metrics. What happens if a person approaches without any credit history? Such applications may come from a college student, a retiree, or anyone who doesn’t possess a proper credit history to reflect.
What is Alternative credit scoring?
The rigid, conventional system declared applicants with zero-credit history ineligible for a loan and made them pay higher interest rates on loans they do manage to get. This is where the system of Alternative Credit Scoring helps them ascertain their creditworthiness- It refers to the use of data from digital platforms and applications on consumer behavior for credit risk assessment.
In the past, credit bureaus were the sole source of consumer credit information. However, with Alternative credit scoring demonstrating the potential strength of combining data from multiple sources, like airtime usage, mobile money usage, geolocation, bills payment history, social media usage, etc, consumers, who were once stuck outside the system, can now build a credit history to access mainstream credit sources.
Benefits derived from Alternative Credit Scoring:
Alternative Credit Scoring, thus, makes the use of real-time data to precisely examine the following three aspects of a borrower: Ability, Stability, and Willingness of loan repayment. This, in turn, leads to:
- Improved Assessment, via current parameters and not historical data.
- Enhanced Market reach a new market for lenders and new credit options and interest rates for applicants to choose from.
- Upgraded customer experience: reduced bias and errors, otherwise common in manual underwriting. Existing customers are offered better deals too.
Location Scorecard- The Master Key:
With data scientists constantly integrating location-based insights directly into organizational workflows and core business decision-making, geospatial-driven data insights are frequently used in predicting an individual's risk level without a credit history.
Location Intelligence enterprises these days can accommodate micro segmentations from thousands of segments and determine micropatterns on a frequently updated basis. The large set of region-specific data that can be potentially collected from telcos include:
- Demographic Profile
- Customer Segment
- Income Proxy or Affluence
- Commercial and Economic Activity value
- Spend Patterns
- Digitization Index
- Delinquency rate
- Daily Commercial Footfall
- Amenity counts etc.
These sets of data help in the fabrication of what we call, in technical terms, a location scorecard, that generates scores to pick up micro patterns. As procured from this scorecard, the risk concentration clusters provide a more reliable credit score for the applicants than could be measured ever.
The Future of this Alternative Credit Bureau:
For a country like India, where a substantial portion of the population continues to remain unbanked, alternative credit scoring is all set to bring forth a huge transition in the lending landscape. Alternative credit scoring via Location Scorecard is already a well-accepted model in the US and has helped both fintech-powered lenders and new borrowers a lot by making credit accessible. While lending firms in some Indian metros have already embraced this methodology to furnish quick short-term loans to applicants (for instance, payday loans), tier 2 and tier 3 cities are yet to benefit from the ingenuity of this modus operandi.