By Diana Taylor and Michael Schlein — Diana Taylor is Chairman of the Board of Accion. Michael Schlein is Accion’s President and CEO.
Two and a half billion people live in poverty and lack access to the financial tools that can improve their lives significantly. The global financial system – as impressive as it is – fails them. Yet, for the first time in history, three major developments make it realistic to imagine a world where we can change that: technology (especially digital and mobile communications), big data (with its capacity to better understand individual behavior), and microfinance (which brings affordable financial tools to the poor) make a vision of a financially inclusive world a real possibility.
In the past, the poor have simply been excluded from the mainstream financial system. Their transactions were too small, the distances were too long, and, generally, it was just too costly to reach them. In the last few years, however, the digital revolution has changed the cost calculation radically, to the point where we are starting to rethink all our presumptions. Mobile phones have become ubiquitous, even among those living on less than $2 a day – today, 85% of the world’s population has access to one. For the first time, transaction costs are being cut dramatically, and distances are no longer insurmountable. We can envision providing for the financial needs of the poor in a scalable, sustainable, and even profitable way.
At the same time, the global microfinance industry has grown to serve hundreds of millions of the world’s poor and their families. We’ve learned a great deal about the products and services that the most vulnerable people in the world need to manage their lives and now appreciate that, in many ways, those living in poverty have more complex financial needs than those with wealth. For example, many of us take for granted that our income and our expenses come at roughly the same time on a monthly basis so that we can pay our bills regularly. For a poor farmer who only gets paid at the time of the harvest, an unpredictable, one-time income has to stretch to cover all business and household needs until the next harvest. So, a safe, affordable place to save is vital, and access to appropriate credit, insurance, and payment mechanisms are arguably more critical for this class of client than any other.
This drive to meet the needs of the poor, combined with new technologies, reveals some very exciting innovations. For example, Tiaxa in Latin America and Asia uses prepaid cell phone history to assess an individual’s likelihood of repayment. The company has developed a proprietary scoring algorithm which then facilitates a seamless advance to complete calls, send SMS messages, download services, or navigate the internet. Tiaxa asks questions such as how regularly a person prepays phone bills and by how much at one time. Based on the answers, Tiaxa can offer the most appropriate “nano loan” for that individual, and is working on using the same system to make small working capital loans to airtime resellers – thus helping to make the mobile phone a more powerful tool for the unbanked. Today, Tiaxa facilitates over one million transactions per day – a success unrivaled by any other big data company serving the unbanked.
In the developed world, many on the margins are rejected by banks, not because they have a bad credit history but because they have no credit history at all – or at least, none that was easily discernable. Big data can increasingly make the invisible visible, which will benefit everyone involved.
DemystData, for instance, leverages thousands of data points drawn from unstructured information like online data to more accurately evaluate loan suitability and creditworthiness. The company’s technology serves under-banked and “thin-file” customers that the current industry too often marginalizes – but perhaps shouldn’t. Lenders can use Demyst’s analyses to evaluate an applicant's quality in real-time based on a range of different attributes. This makes the process more efficient while lessening the burden on applicants: those lenders can say “yes” to deserving entrepreneurs more frequently and efficiently.
Kabbage, another innovator, evaluates borrowers in less than seven minutes based on data that small businesses input into e-commerce services. Lenddo uses Twitter, Facebook, and other social media to assess individual financial needs. Other companies use psychometrics and online financial education to evaluate and improve an individual’s ability to repay a small loan. The list goes on. Most of these are start-ups, but those that ultimately succeed could radically change the ways in which we deliver financial services around the world.
What do all of these start-ups have in common? They all utilize available data – from cell phones, social media connections, utility payments, government statistics, and elsewhere – in order to extend much-needed financial services such as loans, savings vehicles, and insurance to new segments of customers. This includes the 2.5 billion people living on less than $2 a day as well as thin-file clients, such as immigrants, students, and millennials in the developed world – all of whom have traditionally been ignored by mainstream banks.
There are plenty of reasons to be cautious, responsible, and measured in the use of big data, but we shouldn’t let that stop the potential for great progress. Privacy concerns, for example, are real, and we need a healthy societal debate on what data is and is not appropriate to use for what purposes. But there is no question that we can use the data that is increasingly available to rethink the way we deliver financial services for those who have been excluded in the past.
In the near future, customers will be able to receive better-tailored offers and products, while working with financiers who have a more thorough understanding of their needs and circumstances. And the competition to bring in more new customers will generate lower prices and better services for those at the base of the global economic pyramid.
Surrounded by so much potential, we’re optimistic that technology, big data, and our experience with microfinance are coming together and will have a transformational impact on the world’s unbanked and financially excluded populations.
