What is Credit Scoring and how it is related to Financial Inclusion?
We have already discussed credit scoring in Get to Know Credit Scoring through FinTech. To recap, credit scoring is a tool used to evaluate the borrower’s probability of repayment. It is an additional tool from the usual credit scores that financial institutions normally use. The reason behind this addition is because bank’s usual credit scores are based on the ability of repayment and don’t extend to the intention of repayment, thus, add-on credit score needed to be established.
Some may question about how a credit score can assist financial inclusion. Here is an example from Lenddo who targets credit scoring for the emerging market sector. This segment may not have access to financial services or may not have enough credibility yet. Lenddo provides them with credit scores evaluated from social network while disregarding financial statement or proof that may be the reason for low credit scores. In certain cases, banks review Lenddo’s credit score alongside their own. For instance, if the borrower’s credit score with the bank is low but have high scores from Lenddo, they may have a chance for loan approval. This creates financial inclusion wherein borrowers are given access to financial services. This is a “second chance” from the bank.
Metadata – The key access to information for credit scoring
Lenddo analyzes credit scores via social network behavior which consists of the following
- Facebook – In the beginning, Lenddo mainly utilizes Facebook to examine consumer behavior. They had access to the information which can be used to determine credit scores. However, Facebook began to limit access, thus, Lenddo began looking for other channels.
- Android Access or access to Android smartphones usage where information such as frequently visit websites are available.
- Email – Behavior can be analyzed from an email writing style. For instance, it can determine personality based on whether they write the email’s subject.
The mentioned procedure is access to “Metadata” which summarizes data or data used to explain certain data. It is similar to the telephone book wherein one book would consist of a person’s metadata revealing details such as name, address, telephone number. Metadata stores information in a digital form and is vital when exchanging or sharing data. Moreover, it helps to lessen redundant information and increases the credibility of the data. This is why Lenddo’s access to the information for credit scoring is efficient. However, this type of analysis tracks consistency and punctuality of the behavior. This consistency will indicate a person’s repayment behavior.
This is an example of knowledge from FinTech startups and how it has helped increase the quality of life for people around the world. It has encouraged financial inclusion, an issue that related parties should cooperate to support its development. For more information on financial inclusion, visit our blog at Financial Inclusion – Access to financial services increased.
Special thanks to Hong Samakkeenich, Lenddo Country Director, Thailand for her session at the Startup Grind event.