Home ›› 11 Oct 2021 ›› Opinion
Bangladesh has seen an exponential growth of MFS. We belong to a nation of nearly 170 million individuals. The sheer amount of data generated-structured and unstructured-is indeed a powerful tool to be leveraged. However, it is startling that while there exists plenty of opportunities in the cross-section of technology, financial services and digitization, many of the processes that lie here are largely outdated and are in dire need of innovation. Take the traditional credit scoring model, for instance.
Around two billion people in the world are labelled as “unbanked” or “credit invisible”. Because of little to no financial history, traditional financial institutions immediately deem them as not being credit-worthy without any deliberation. In case of Bangladesh, what is alarming is that this is the plight of 67 per cent of the adult population of our country, a significantly larger amount than the global average of 50 per cent. Moreover, the very people who are dismissed as being uncreditworthy are powering the economic engine of the country through microenterprise. It is, after all, responsible for 25 per cent of our country’s total economic output and holds more than 57 per cent of total employment. Despite their remarkable contribution, their lack of financial and transactional data means that they are overlooked in the formal credit market. And therein lies the failure of traditional scoring models and the opportunity for alternative data sources.
The landscape, as it stands now, pushes the unbanked masses towards the informal credit market, composed mostly of cooperatives and personal lenders. But the high interest rate charged by this segment of the sector, often 10 percent per month, makes them nothing short of loan sharks. Moreover, this unmet and underserved market demand is worth roughly more than 627 million BDT and since the traditional credit scoring process of our country hasn’t been revisited in around 30 years, it is high time that we look into digital intervention to bring about financial inclusion for the 70 million “credit invisible” people in Bangladesh.
The main characteristics of a good reliable source of alternative data are coverage, specificity, accuracy and timeliness, predictive power. Telecom passes this list with flying colors. With 85 million unique mobile connections, this provides widespread coverage in the country. Moreover, telecom operators are working with data on enormous breadth and depth. For instance, more than 400 million CDRs is generated daily; this is big data in its truest sense. When aggregated, this data offers unique insight that can be traced over a long period of time, enhancing its predictive capabilities. This is information that can be a powerful additive to traditional bureau data.
It is also the place where blockchain analytics can be leveraged as an underlying technology. For instance, a blockchain-based encryption engine can ensure that the data analyzed is encrypted and anonymized while the relevant stakeholders receive only the credit score and not any part of customer data. So, even though the customer gets a unified credit score that makes their lives easier, their data is still secure. This is a model that places customer trust and transparency in the center of its operations.
Globally, this has already been embraced. Swedish telecom company, Telia, has an alternative credit scoring platform that offers straight-through processing for its loan applicants. Experian Boost is an American credit company that uses the FICO 8 scoring model that uses a variety of alternative data including telecom information to strengthen its consumers credit score. A similar solution is also in the works in China as China Telco and Cignifi have already developed their own credit scoring models. KT, Korea’s largest telecom company, also offers alternative credit scoring in the form of K-Telco Score through CRDP, their application and service delivery platform. The 24 hours’ worth of lifestyle insights generated through telecom data is indeed a strong viable source of information to track consumers’ socioeconomic activity and thus, unlock the keys to financial inclusion for the people of the world. The most promising Ant Financials’ MY Bank managed platform on the 3-1-0 system, which users promised registration within 3 minutes, approvals within 1 minute, with zero human intervention is the ultimate destination.
As a country, Bangladesh too is gradually adapting to digitalization – more people are now using mobile banking than ever. This has paved the path for organizations to come forward with powerful initiatives that can transform the financial industry of our country and that’s the daily 2B BDT daily transaction with 140M mobile wallet penetration showcase a massive potential.
With the declining market of the pioneer and winding off operations of various traditional MFIs, the survivor must ensure the late mover advantage assuring leap frog approach addressing the whole ecosystem not limited to regular cash out, float, utilities and payment ecosystem rather must enter into disruption avenues like DPS, Nano loan and micro credit hence alternate credit scoring.
Regarding digital credit assessment, local experts claim that Alternative Credit Scoring is more reliable than the traditional credit rating method; a person’s creditworthiness can be better assessed than evaluating their income. Now that Bangladesh has been the champion of micro credit ecosystem, with a flying opt in trend to mobile wallet penetrations and new entrants of MFS with clear aspiration it is time to ensure the paradigm shift of the overall traditional scoring into alternate scoring reducing the cost load of the population from 23 per cent to 9 per cent and most importantly ensuring comfort to the ecosystem right from the user, MFIs to regulations to lending partners like Banks.
Alternate Credit Scoring has a lot of potential to initiate new types of financing in various industries predominantly Retailer & Distributor Financing for FMCGs, TELCOs and SMEs. It is a matter of great pride that Bangladesh has done phenomenally better than many nations to surmount the challenges during COVID-19. But with alternate credit scoring, the ecosystem can truly flourish by benefitting the enabler segment. Here’s a clearer picture-, when the economy hits a standstill and the lockdown was imposed on the nation, the unbanked masses were the one who were left helpless by harsh economic forces. It is to benefit them that the organizations and corporates along with financial partners and relevant entities like mobile operators, MFIs need to step up into the realm of alternative credit scoring. This will not only allow these significant economic actors to grow but also retain their businesses.
Instead of following the predecessors building and wasting time on the ecosystem, it is wise to be part of the outsourced ecosystem with shared risks and operations. Thus a startup or struggling MFS can take the following advantages:
MFS can now make extensive use of applications and software in partnership with the existing credit rating companies who even obtained the go ahead from the relevant regulators for developing, testing and refining Fintech Solutions, thereby attracting a critical mass of users for the technology to gradually become mainstream. Just imagine in order to offer a handset financing, the customer willing to transform from a 3G to 4G environment will opt in to the app for fulfillment, based on the profile based approval, the device to be delivered to his/her doorsteps and most interestingly the collection to be made only based on that MFS. Can you imagine the stickiness?
The provision of inclusive finance hinged upon the capability to develop individual credit profiles in an innovative, efficient, and scalable manner. With constant data mining and maneuvering the intended profile the accuracy of the profiling can reach more than 90 per cent depending on the goodwill and stickiness of the base. As per the status quo, the credit rating engines are getting ready with more than 18 month, Financial Institutions including Banks, NBFIs, MFS providers, Insurance companies and NGOs need to step forward to embrace this new concept of utilization of alternative data for analyzing the credit-worthiness. By adopting proper policies and developing the right ecosystem, a level playing ground can be created for all involved parties-MFIs, banks, telecom operators, credit rating agencies and others. Bangladesh has every potential to enter into the next generation financial sector and ACS offers a remarkable opportunity to do so through harnessing the strength of customers’ telco data and their digital footprint.
As mentioned above, the schedule bank with the support of the credit profile will be able to use the data analysis and artificial intelligence to provide timeline and intelligent customer service. We have come to the conclusion that digital disruption holds the most potential in the fintech industry. And one of the ways we can leverage it is to help develop alternative scoring models. Needless to say after some ground breaking regulations on agent banking, MFS and interest cap, it is time to establish the regulatory framework on Fintech sector to strike a balance between technological innovations around big data analytics, artificial intelligence with block chain ecosystem and societal stability where alternate credit scoring now is a low hanging fruit.
The analytics engines are already set up by operators as well as some MFS; with a vast wellspring of information across more than 400 data variables including data and voice usage, top up patterns, location etc., it is important that it is put to use in a way that benefits the underserved masses among us and regulatory can implement regulations on the credit scoring accreditations,
IT and information security protocols like GDPR (General Data Protection Regulation) and push the boundaries beyond agent banking and traditional SMEs ensuring digital fulfillments such as alternate CIB, digital forms, online approval and collections hence the administration of the activities of the Peer-to Peer Lending Intermediaries.
As it is inevitable that information security, IT security, consumer right for data protection and proper ecosystem is mandatory for the successful operation of the business, under the status quo of regulatory approved data analytics licenses and readiness of data mining by many Telcos and financial institutions of the country, I can see a huge opportunity lying ahead which will not only assure a leap frog approach for the new entrant MFIs but also will add a huge value to the digital divide of the bottom of the pyramids to get rid of the un-conventional loan sharks in semi urban and rural setting. The MFIs can start at middle tier with the campaigns like handset financing, the fishermen segment and slowly moving into agricultural human resource.
The writer is a Fintech specialist
