Alternative data: a new era for credit lending

Alternative data has the potential to propel global financial inclusion even further forward. But what is it? How does it work? And what does it mean for the future of credit access in emerging and developing markets?

Alternative vs. traditional data

Alternative data is changing the face of lending across the world. It is opening up new financial opportunities for service providers, and their end users. From obtaining nano loans to device financing, the rise of alternative data means that more people than ever before could have secure and responsible access to credit solutions.

But how do we define alternative data? And what makes it different from traditional data? Essentially, alternative data is information that is collected from non-traditional sources. This could include rent, telco, and utility payments, or Know Your Customer (KYC) and mobile wallet data. As with traditional data, it is leveraged to help build out a profile of the prospective loan applicant, get a good idea of their financial reliability, and therefore optimise the accuracy of the decision-making process.

In contrast, traditional data is obtained from the credit bureau, which has a rich depth of credit history, such as previous loan repayments, credit enquiries and/or applications. Although this remains the most common way to assess creditworthiness – particularly in economically advanced markets – its use can be a significant roadblock to credit for those without an existing credit history, or the means of building one. And, without access to regulated credit lending services, millions of individuals across the world risk either becoming trapped in cycles of debt from unregulated lenders – such as loan sharks – or are unable to participate in the larger economy at all.

How does alternative data work?

As with traditional data, alternative data usage requires robust processes and protocols. As a first step, Ezra collates, validates and ensures consistency on its alternative data sources (typically from KYC, GSM and mobile wallet data.) 

Alternative data is consumed in various ways, such as the development and build of prediction and behavioural models, to apply credit policies, and to build affordability and/or income estimation models. These then enable risk-based exposure assignments to be managed on an iterative basis, to ensure a viable long-term customer value proposition and prevent over-indebtedness.

Ezra leverages these datasets to build the foundations of its risk profiling and segmentation, which are then overlaid with income or affordability assessments. This provides the infrastructure through which first loans can be offered. Subsequent loans then overlay the loan performance data, to better optimise the risk and affordability moving forward.

What difference does it make? And to whom?

In the US alone, it is estimated that the use of alternative data could enable 19 million more adults – approximately 5% of the population – to be properly evaluated for credit. Given that the US remains the world’s largest economy, the impact of alternative data around the world could be even greater. 

For those in emerging and developing markets, where larger proportions of the population are likely to be financially underserved, unbanked, and without a traditional credit history, alternative data is a vital tool in the progression towards global financial inclusion. It is not only hugely beneficial for making informed and empirically based lending decisions but is now being used to power credit scoring engines, such as Ezra’s, to deliver key financial services to those who need them most.

For example, the World Bank estimates that formal micro, small and medium enterprises (MSMEs) contribute up to 40% of national income in emerging economies. However, it also notes that access to finance is the second most cited barrier to growth amongst MSMEs in emerging markets. In Nigeria alone, it is currently estimated that only 4% of the 40 million MSMEs across the country have access to credit. 

This is where the use of alternative data can make a real difference for all types of micro/small business owners, from city street vendors to rural agricultural workers. Unlike traditional credit scoring systems, those which leverage alternative data promote a far more inclusive approach and widen the pool of prospective customers for financial service providers. In doing so, they also bring more end users, such as MSMEs, into the global economy, allowing them to participate with greater agency

It also enables more children to stay in formal education, and, in the long term, could lift millions out of poverty and debt cycles. In this respect, alternative data is one of our most powerful tools for enabling financial inclusion, and levelling out the global economic playing field.

What does the future hold?

Andrew Goodrich, Chief Risk Officer at Ezra, says: 

“In the absence of data which is generally available in more mature lending environments, and with many of our partners’ end consumers having little to no access to financial products, alternative data has become a highly risk-effective and viable means of bringing Ezra’s products to market.”

“It enables Ezra and its partners to define and develop the next generation of products that can align and evolve with the needs of the respective market segments, and thereby enabling future wealth building and economic growth opportunities. In turn, the financial product suite can evolve to savings products, nano-investment products, longer-term lending products, and micro-insurance.”

“In effect, Ezra is building data wealth and depth that could be deemed equivalent to that which is available with credit bureaus.”

At Ezra, we leverage alternative data to provide innovative microlending products for banks, mobile network operators, utility companies, and e-commerce platforms. Every month, our robust, proprietary credit scoring system processes applications for more than 40 million active users throughout financially underserved markets. In doing so, we’re helping to shape the future of financial inclusion for all. 

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