More than a third of the world’s adult population makes little or no use of formal financial services, let alone access to credit. Accenture estimates that bringing unbanked adults and small micro-businesses into the formal banking sector could generate about $380 billion in new net revenues globally by 2020. Are traditional lenders i.e. banks and credit unions doing enough to capture and service the financially excluded? The emergence of Fintech lenders has created a rift and a warzone between traditional lenders and fintech lenders, with banks and credit unions questioning the adequacy and authenticity of the data being used by Fintech lenders to give credit to the marginalized. From a design thinking and even the processes perspective, Fintechs have availed ubiquitous, contextual customers touch points and streamlined the application process. The decision making process has also been made seamless through the heavy use of the latest analytics techniques and the reliance on alternative data. For instance, an applicant’s payment and billing history (including utilities, airtime recharge, insurance, location enabled services on smartphone devices, social networks and even alimony) is used to create a credit score and predict the likelihood that the loan will be repaid. These are not factors that are reflected fully in the traditional credit scores.
Other traditional data points carrying predictive value include transactions and cash flow data reflected in bank account statements, which is where traditional banks fit in. In Zimbabwe, recurring deposits can be used to get a more accurate picture of income, including supplementary income, while recurring cash outflows and payments help paint a portrait of financial commitments with the assistance of credible credit registries and other third party players. It is also important to note that Fintech lenders also play the role of credit registry in some cases, hence the pie continues to shrink for traditional banks and credit unions. Fintech lenders also obtain records of credit card transactions. Access to this type of data requires the applicant’s approval and authorization which is already happening in other markets such as Europe facilitated by European Union’s Payment Service Directive (PSD2), under PISP (Payment Initiation Service Provision), and in other developing markets such as Zimbabwe via Third Party Payments Service Providers (TPPSP).
What standouts as one of the most attractive features of getting credit from alternative fintech lenders is how quickly lending decisions are made. This is so because Fintech lenders have access to nontraditional data sources that are not used (or not available) to traditional bank lenders, and more importantly the autonomy. The premise is that if payment histories on the basis of common consumption patterns or events can be recorded and collected the same way financial institutions are doing and even better, it is possible to build credit by a financial technology company.
Furthermore, it also appears that most Fintech lenders specialize in unsecured personal lending and peer to peer lending driven by growing consumer appetite for personal loans and social credit, creating a marketplace for peers to lend to individuals and SMEs underserved by the traditional lending sector. It also goes without saying that lack of data, especially for SMEs and Micro-business, has led to traditional lenders putting most of their focus and effort on corporate structured lending leaving the door open for Fintech lenders who have the capability to harness the data. This suggests data management is now more essential in credit practices than ever TransUnion estimates that fintech lenders now originate 38% of all unsecured personal loans. What is especially remarkable is that back in 2013, fintech lenders generated just 5% of personal loans.
In my view, data and the manipulation of it will help drive simplicity, enable contextual services; lower cost to serve, optimize risk and ultimately result in customer obsession and product of one. In the midst of all the wrangling between traditional lenders and fintech lenders, there is still a huge opportunity for them to collaborate and provide service to the marginalized. Banking remains a necessity but are banks still necessary? To what extend can the fintech lenders and traditional lenders collaborate?