A new category of technology enterprises are disrupting the traditional way of assessing consumer credit risk in emerging markets, according to a new Omidyar Network report, with non-financial data helping providing effective credit assessments to those that previously lacked them.
In its research report – Big Data, Small Credit: The Digital Revolution and Its Impact on Emerging Market Consumers – Omidyar Network said using non-financial data such as social media activity and mobile phone usage patterns, big data analytics was delivering a quicker, cheaper, and more effective credit assessment of consumers who lack credit histories and were invisible to lenders before.
“The financial services industry is on the brink of a new era, where harnessing the power of digital information to serve new segments is becoming the new normal,” said Mike Kubzansky, partner at Omidyar Network.
“Companies in the ‘big data, small credit’ space are an example of how this paradigm shift can unlock an entire new pool of customers for formal lenders, while helping consumers in emerging markets get the services they need to improve their lives.”
The report looks at how the digital revolution and the resulting explosion of data have converged to enlarge the addressable consumer credit market for traditional and alternative lenders in developing markets.
It also explores the opportunities and challenges ahead for new businesses in this sector, sharing the results of an in-depth consumer survey with early adopters in Kenya and Colombia, and provides recommendations to key stakeholders on how to reap the benefits of this new, evolving field.
“Listening to the early adopter consumer is at the crux of realizing the potential of the ‘big data, small credit’ business,” said Arjuna Costa, investment partner at Omidyar Network.
“Our survey shows that consumers in emerging markets have a clear understanding of the privacy tradeoffs this type of solution entails and seven out of 10 are willing to share information they consider private in order to get a loan.”
Early adopters can articulate, differentiate between, and rank different types of private information. They are also younger, stably employed, and more educated and tech savvy than the average population of both surveyed countries, an attractive consumer segment for any lender. Yet when faced with emergencies and cash-flow challenges the large majority still resort to an informal source, such as family and friends, or pawnshops and loan sharks.
Omidyar Network says it is still early days for businesses in this space, and most providers are still experimenting with algorithms, models, and data sources. However, it said both the economic and social benefits of this approach can already be ascertained.
As part of its financial inclusion initiative, Omidyar Network has been a long-time investor in solutions directed at reducing the high cost of credit assessment in emerging markets, including early-stage investments in companies such as Lenddo, Cignifi, and RevolutionCredit.