Alternative credit data points- A Boon For Both Lenders and Consumers

Picture this. John is a college student, and he has his parents’ wedding anniversary coming up. He wants to get them something special for the occasion, but he can’t because he realized that he doesn’t have enough pocket money for a gift. So now what? Effectively, he cannot do anything now, because he has no options left. Why? Well, if John were to approach a bank or any other financial institution, they would show him the door. Since he's just a student and doesn't have a job, he has no repayment capacity to speak of. Therefore, he also doesn’t have a credit score, which is the basis on which all banks lend. This is also the case of let’s say, a factory worker in rural India, who also cannot even borrow Short-term Loans up to amounts like ₹ 5,000. In his case, he already knows that a bank won’t grant him a loan, because of his poor repayment history. And how would the banks know that? Through his credit score, of course!

When it comes to banks and other traditional financial institutions, an individual’s credit score is the basis on which they lend, because it is a reflection of several things – his repayment history, the number of ongoing loans he’s paying off, the terms of those loans, and his credit card usage. Banks can even find out the number of times a customer has inquired about a loan through his / her credit score. However, this is not a comprehensive lending model. The following are a few flaws of lending based only on an individual’s credit report:

  1. It assumes that everybody has access to formal, organized lenders like banks.
  2. It assumes that everybody is able to actually obtain loans through these banks.
  3. It also assumes that all customers have credit cards.

All of the above points are of course, false. Almost 70% of all bank consumers are either un-served or under-served, and most of them live in far-off, rural areas, without access to banks. Even fewer numbers have access to credit cards. Therefore, all such consumers who can’t even borrow from traditional lenders like banks, won’t even have a credit history which means that they’ll always be denied credit, be discriminated against, and will have no option but to use other options like small, local money-lenders who charge terribly high rates of interest.

So what do customers do if they are in urgent need of a Small Loan but have no credit history/poor credit history? Traditional banks and lenders are out of the question, so they need to go to other non-traditional lenders who don’t only look at their credit score while assessing their loan eligibility. Fintech companies are one such example. Fintech refers to financial technology, and refers to technology based-businesses and organizations that provide financial services to large segments of the population that are under-served by traditional lending organizations. One of the main advantages that Fintech companies offer is that they look beyond an individual’s credit score and credit report. They also look at alternative credit data points from social, demographic, and financial data. This includes the customer’s spending habits, their lifestyle and interests, and sometimes even their social media profiles!

Taking alternative credit data points into consideration have a lot of advantages for both the lending organization and the borrower. The lending organizations (like Fintech companies) get to make use of a big opportunity of accessing a huge chunk or un-served/under-served consumers with unmet financial needs. That way, customers who actually have the means to repay but were earlier neglected by traditional banks (like college students and customers from the lower middle-class and urban/rural poor segment) can now meet all their financial needs easily. They are even saved the embarrassment of borrowing from family members and/or friends. Lenders who use alternate credit data points are also able to create a more holistic credit profile of their customers, giving more clarity into the risk they pose as a borrower.

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