Alternative data has the potential to put previously ‘invisible’ individuals on the map, unlocking opportunities for financial inclusion and economic growth.
Over the past decade, there has been an observed migration to the digital world, with mobile and internet penetration now surpassing bank penetration in most emerging markets. This shift has fundamentally transformed the financial services landscape, giving rise to unprecedented opportunities for financial inclusion.
Central to this transformation is the emergence of alternative data – non-traditional data sources that can be used to draw insights on a consumer or business’ financial profile. This includes anything from mobile phone usage, monthly payments (e.g. school fees or electricity bills) and social media activity, to biometric identities derived from iris scans, fingerprints and hand geometry.
These data sources have the potential to overcome barriers to financial inclusion, by creating identities for previously ‘invisible’ individuals and enabling more accurate risk assessment of currently marginalised consumers.
This Is Me
Of the 2 billion people currently excluded from the financial system, 1.1 billion cannot prove their identity. This prevents access to financial and other basic services, as individuals are unable to verify even the most basic of personal data – including their full name. Where unbanked consumers do have formal identification, they often lack the documentation and credit records required by financial service providers to assess creditworthiness and perform consumer due diligence (often referred to as ‘thin-file’ customers). This discourages financial services providers from serving bottom of the pyramid customers or charging exorbitant interest rates to cover unforeseen risk.
Alternative data can expand access to both ‘invisible’ and ‘thin-file’ customers, by creating financial identities without traditional documentation and formal credit histories.
In the absence of issued identity documents, birth certificates or proof of address, alternative data can be used to verify personal identity. In sub-Saharan Africa, where 46% of the population are institutionally ‘invisible’, re-establishing identity represents a significant opportunity for inclusion. Recognising this potential, emerging players are leveraging disruptive technologies to find meaning in existing data. For example, blockchain startup Taqanu uses refugees’ digital footprints to create reputation networks as a form of identity authentication, enabling access to basic bank accounts and other essential services. EcoCash, a Zimbabwean mobile payments platform, has partnered with a local mobile network operator, allowing applicants to use their SIM card registration to verify their identity.
These alternative sources are not easily lost or damaged and are less susceptible to fraud. They are less costly to maintain than traditional paper-based documents, which require storing, continuous updating and are difficult to quickly navigate. Importantly, these alternatives enable remote account opening, lowering the operational costs for banks aiming to serve often isolated consumers. The ability to authorise access to personal data, pre-populate forms and verify signatures remotely fundamentally transforms opportunities for financial access – allowing banks to reach individuals in areas where they have never established a branch.
Making (Credit) History
Unlike traditional financial data sources, alternative data does not rely on an individual’s previous borrowing behaviour to predict their future behaviour. This enables consumers to overcome the paradox of modern credit – in order to obtain credit, one must have a credit history. For individuals who lack the transactional records required for credit risk assessments, traditional frameworks result in perpetuated exclusion from the financial system. These exclusive frameworks prevent 93% of sub-Saharan Africans from accessing formal credit, limiting opportunities for productive investments and social mobility.
Alternative data models recognise that no credit record is not synonymous with a bad credit record. The majority of credit ‘invisibles’ do engage in financial activities where periodic payments are required, including school fee payments, mobile purchases and TV license payments. This implies that even consumers who have never owned a bank account have a transactional and behavioural history which can be used to assess their creditworthiness – and often, these histories can provide a more robust idea of individuals’ profile and needs.
For example, Cignifi uses mobile phone usage not only to assess a consumers’ credit risk, but to predict the likelihood that the individual will adopt a specific financial product. These insights can be used to target unbanked consumers with relevant products that are attuned to their financial needs. Following the group accountability model used by micro-financiers, Lenddo offers loans and free financial education to individuals based on their LenddoScore – a risk rating generated using the social media activity of both the applicant and their network.
By leveraging these alternative data sources, lenders can construct a richer, contextual understanding of individual consumers, enabling both more accurate risk assessment and personalised customer experiences. Importantly, these methodologies allow individuals to demonstrate their creditworthiness in the immediate term, rather than over a number of years. Combined with emerging technologies like artificial intelligence and machine learning, lenders can automate manual tasks in the credit approvals process, significantly reducing the time and cost of borrowing, and enabling the viable provision of credit to previously excluded customers.
Is Alternative The New Mainstream?
In Sub-Saharan Africa, the volume of data generated by mobile phones is set to increase by more than 200% between 2016 and 2019. Used correctly, this data represents an unprecedented opportunity for the advancement of financial inclusion. However, as with all technological frontiers, there is the potential for exacerbated exclusion. As digital identities become increasingly mainstream, we must be mindful of those who do not generate an alternative data footprint, and are therefore at risk of perpetuated isolation.
To ensure that alternative data benefits as broad a group as possible, industry collaboration will be required. Stakeholders must strike a fine balance between openness and privacy. To enable scalability and robust predictive power, alternative data will need to be made interoperable with both traditional systems and the emerging alternative ecosystem. This will require harmonising disparate data sources and biometric identities, and widespread information sharing amongst providers.
At the same time, this openness must be tempered to ensure that the privacy of (particularly vulnerable) consumers is protected, to guard against exploitation and risks of fraud. Emerging technologies such as blockchain have the potential to provide greater levels of autonomy over personal data, while enabling identities that are shareable, borderless and immutable. Leveraging these technologies will prove crucial in ensuring that financial inclusion works for those it is meant to serve.
Disruptive analytics have the potential to shift the financial paradigm – establishing identities for previously invisible individuals and enabling financial solutions that are attuned to the needs of the unbanked. Used in conjunction with complementary technologies, industry collaboration and the right social objectives, alternative data can uncover hidden figures, driving financial inclusion, catalysing growth and putting the invisible on the map.
For examples of providers leveraging alternative data, see Tiaxa, Branch, Jumo, Social Lender, Konfio, Tienda Pago, Sidian Bank and Segovia.
Meltwater is a global leader in the collection and analysis of alternative data. The media intelligence leader has been using alternative data to track and measure brand mentions across social and editorial media, to predict trends and to help companies make better business decisions. For more information on how alternative data can help your business, reach out to the Meltwater Africa team.