So, how does a firm evaluate credit when dealing with a population without access to standard credit monitoring or mainstream banking products that tend to help build credit?
For an emerging number of Silicon Valley firms, the answer is increasingly a simply question: How do consumers use their smartphones?
By their nature, smartphones collect a lot of user data — text messages, social media posts, retail receipts, etc. — creating thousands of behavioral clues and data points that a potential creditor might take interest in, if only it was all compiled into a single place.
And the details that are of interest may be surprising, including how many texts a user receives, how often they charge the device, how far they travel with the phone on a given day and even how people tend to enter names into a phone (those who add both first and last names tend to have higher creditworthiness, apparently). Even more surprising are the correlations that show up.
While one might assume gamblers are less likely to repay loans than non-gamblers, app-based microlender InVenture’s algorithms actually found the opposite.
“You’re able to get in and really understand the daily life of these customers,” said InVenture CEO Shivani Siroya. Her company’s scoring formula analyzes 10,000 signals per customer.
The loans, particularly in developing nations, are essentially microloans measured not in millions, thousands or even hundreds of dollars but instead in mere tens. A Kenyan cab driver borrowing $30 to gas up the vehicle or $50 to a fruit seller re-upping on produce. The interest rates range from 6 to 12 percent (based on creditworthiness) and are usually repaid within six months.
This is differentiated from “traditional microlending” largely by its cost. Due to difficulties in evaluating credit in some locales, microloans of the past edged up around 25 percent interest, mostly to offset the risk associated with underwriting a population full of unknown variables and the high cost of sending representatives out door-to-door to assess applicants’ abilities to pay.
The app-based lenders, with their attractive lower rates and extremely low overhead costs, are attracting big interest — and big investments — from the big names in Silicon Valley tech.
The new wave of alt-lending in the developing world is catching on and riding the draft of increased smartphone penetration in a market that has been, until now, largely dominated by the feature/candy bar phones of the past. A Pew Research Center report from April states that 34 percent of South Africans, 27 percent of Nigerians and 15 percent of Kenyans own a smartphone.
Alt-lending in these countries is also riding on a wave of Silicon Valley enthusiasm for assessing risk based on non-traditional factors, with firms like Affirm, LendUp and ZestFinance drawing far and wide from diverse data streams to make decisions about loans for individuals and small businesses.
Overall, InVenture’s Siroya said the goal is to prove to the world what its algorithms already know: Developing world borrowers are not nearly as risky as commonly thought.