Credit Scoring via Mobile Activity: A Game Changer for the Unbanked?

Credit scoring through mobile-behavior analysis may be good news for the developing world and the financial industry.

Every industry has its blind spots – the areas where no business has succeeded before. When it comes to the financial industry, and more specifically banking, the blind spots are enormous. Around 2 billion people worldwide, more than a quarter of the global population, don’t own a bank account.

Michael Pearl Head Of Business Intelligence
Michael Pearl
Head Of Business Intelligence

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In the developing world countries, creditworthiness is a very complicated assignment.

Two Billion People Unbanked

The reasons for this figure is obviously the lack of infrastructure and technological solutions necessary to establish banks in some parts of the developing world. However, in many cases, it’s also a matter of creditworthiness.

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Assessing the creditworthiness of a lender is a key feature in the financial industry, not to mention the banking sector. It allows the creditor to assess the odds of getting his money back and to set the interest rate and the collateral accordingly.

When it comes to retail and small-business lenders in the developed world, this task is quite easy. The patterns of our financial activity are quite transparent, due to the fact that almost any transaction is documented and is eventually processed in one’s bank (in most cases). This trend will only grow, with our inevitable movement towards a cashless (or almost) society.

This allows the banks to know who we are – money-wise – and to know better if a certain credit suits us or not. Different countries have developed different methods of doing that process. The general notion is based on private companies, such as Experian and Equifax, that conduct the test scoring.

In developing world countries, creditworthiness is a very complicated assignment. The main reason for this is the lack of documentation on the financial activity of a person or a small business. If you live in a village with no bank in a 100 km radius, and you pay for almost anything with cash and receive your salary in cash (or even goods), it’s virtually impossible to decide if you are a ‘good lender’.

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Credit Scoring Solutions

For this reason, so many people in developing countries (and in some quite developed ones) don’t have a bank account. India, China, Indonesia, Pakistan and Bangladesh are leading in this category and are home to almost half of world’s unbanked population.

India, China, Indonesia, Pakistan and Bangladesh are home to almost half of world’s unbanked population.

Many people and companies (from NGOs to psychologists and fintech entrepreneurs) have tried to offer solutions to this problem, both for humanitarian and commercial purposes. VisualDNA, a London-based psychometric company, is using its skills to try to bridge this gap.

The company (alongside some smaller competitors) claims that we can use the psychometric test to assess one’s creditworthiness, just like we assess his learning skills in a university. Their programs are successfully running in India, Peru and other developing countries in LATAM, Africa and Asia.

But recently, another non-less efficient form of credit scoring has emerged – analysis of one’s mobile activity. According to an article published on Bloomberg this week, your “relationship” with the mobile phone can say a lot about your attitude towards lending, and most importantly repaying. Apparently, there is a correlation between economic activity and mobile usage.

More and more financial institutions are performing credit scoring based on data they receive from phone companies. Equifax, for instance, has been successfully using this method in its Latin American branch for the last 2 years. This practice has been in use for a few years, but recently it gained sufficient validity to be referred to as an actual credit scoring method.

This method, of course, has its flaws, the main one being legal issues of privacy. This of course, also leads to compliance costs and operations. However, bilateral agreements between telecom companies are resolving most of these issues and paving the way for this practice.

It’s still early to say if credit scoring through mobile-behavior analysis is a game changer for the unbanked and underbanked population. But this method is definitely good news for both the developing world and the financial industry.

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