What is creditworthiness? It’s your ability and willingness to pay back what you owe. How does one calculate the creditworthiness of a person? After all, an entire sector of the banking industry relies on it. Lending is one of the major verticals of the banking industry and ever since the beginning, banks have tried many different methods to calculate the credibility of the borrower. Thanks to technology, banks & financial service providers have all the information they need to make a judgment about the borrower’s creditworthiness.
What are the data points?
Data points are simply a large set of random questions that are answered using the information we already have. These data points are collected primarily from your phone, your social media profiles, bank accounts, and these data contain a lot more information than you think. In some cases, more than 10000 questions about you are answered with this information. All of the information from you are gathered with your consent and is used in finding your credibility using various proprietary algorithms by tech companies.
How are the data points collected?
Most of these data are collected from your mobile device through the apps you install. When you download an app that provides personal loans and creates an account through OTP sent to your phone. The app then asks you permission to access your phone data. Storage, Contacts, SMS, Phone, Location, Camera and others. Those apps clearly display why they are collecting your data and how they are going to use it. As I mentioned earlier, this information is used to answer multiple questions about you. For example, 1. How many apps do you have on your phone? 2. How many contacts you have? 3. How may SMS you receive in a day?. SMS has more information you can possibly imagine. Whenever you make a transaction on your bank account or your credit card, an SMS is received to notify you about that transaction. Using that information, algorithms calculate, how much you earn, how much you spend, where you spend, what your electricity bill is, what your gas bill is, whether you have any loans, whether you have an online gambling addiction and much more. Apart from these data points, they have access to your location, phone storage, contact list.
After this stage, they ask you to connect your account to your social media like Facebook, Instagram, Twitter & LinkedIn. Using these platforms they get further information like, how active are you, how many friends you have, how many followers you have. Also, phone number and email addresses are collected again through these platforms to double-check if you have more phone numbers and email addresses. Beyond that, they understand your page likes, retweets & frequently used hashtags and many more.
Further details can be collected using your bank account. You usually need to upload your bank account statements for 3 months via uploading a PDF or logging into your bank account through a special login created by the lender. Here companies like Perfios are a greater help in analyzing these bank statements. If you are a business you can even provide your goods and service tax statements to increase your credibility. It will lead you to get a higher loan amount, lower interest rate, longer tenure, and other benefits.
Before you freak out about your privacy, think about it. This is a good thing. This is far better than a good. This is awesome. In the old days, you need to talk to a bank employee if you want to take a loan. They ask you to fill and long application form, they ask you for an asset as collateral for the loan. Then they check your credit score on the credit bureau. If you have a sufficient score, they sanction the loan. Using these methods, everything is digital, effortless, instant, reduces a lot of manpower from the bank’s side and totally eliminated your hassle of dealing with banks.
You might think why can’t we use the old system? I’ll tell you why. This old system is inefficient and broken. It might not look like it is. But it definitely is broken. There are six major credit bureaus in the country.
- TransUnion Credit Information Bureau (India) Limited (or CIBIL)
- Credit Rating Information Services of India Limited (CRISIL)
- ICRA (formerly known as Investment Information and Credit Rating Agency of India Limited)
- CRIF High Mark.
You might have heard about a few but not all of them. The problem with these credit bureaus is simply the number of data points. They collect very little information that simply is not enough to accurately calculate the creditworthiness of an individual. They get the data about their loan books and customers from banks and NBFCs every month. It simply gets the repayment history if an individual which is simply not enough. If you are someone who never borrowed from a bank or an NBFC, your credit score doesn’t exist. Without a credit score, it’s nearly impossible to get a loan from a bank.
So this alternative data not only provided better and more accurate creditworthiness but enables millions of people who do not have a credit score to enter the formal economy. To conclude the privacy concerns, you have to understand that information collected from you are for the eyes of the machine only. It simply is too much data to be processed by a human. Those data are used very efficiently to provide you with the service you need. Those data effectively help the companies personalize the product just for you. That is pretty great.
By now you will have understood that data collection and processing for providing personalized service is too big of a task for every banks and NBFCs to replicate. So there are companies that help the lenders do that. There is Perfios that is great with analyzing bank statements and collect data points. There are also other services like Financial Statements Analyzer, Company Analysis Report, Tax Statement Analyser and more. Many of the big NBFCs & banks use their service to better serve their customer. There is another company called CreditVidhya that collects data from your phone and uses artificial intelligence to analyze the data to provide better services. There are lenders like ZestMoney & Branch who created their own proprietary data collection and analysis methods.
Branch is a lender who created their own algorithm which they used in African countries like Kenya to provide short term loans to people who doesn’t have even bank accounts. After starting their operations, the company found out that there are people who are creating fake accounts on Branch to get loans with no intentions of paying back. They started working on the problem and found out that it was just a dozen people who got a loan for almost $50000. Some times, they pay back the smaller loan to get a bigger amount and run off with that money. The company solved this problem by introducing “Similarity Identification” in their algorithms. They even contacted the people who took the money and worked with them to understand how they were able to trick the system to create multiple accounts.
As I always say, access to financial services should be a basic human right and the new-age fintech companies are bringing in millions of people into the formal credit system. They get their formal credit score which can be then used to get loans from banks and NBFCs. It can transform the lives of the people and the community. It can transform the economy. At this rate of development in banking infrastructure and the number of people being introduced into the formal economy, we might be the first country ever on the planet that made access to financial services possible to everyone. If you want to talk more on this, hmu.
- Letting the companies use your private data can only bring you better financial products and services at a better cost.
- You can get a loan at any time and anywhere. You never have to talk to another bank employee ever again.
- As technology grows, we will see further improvements in data collection and analysis.
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