Zopa, the first marketplace lender in the world, was born in the UK in 2005. In the next couple of years, two of the biggest economies in the world–United States (Prosper in 2006) and China (Paipaidai in 2007)–opened the gates to marketplace lending (MPL). However, it wasn’t until the 2008 financial crisis when alternate lending gained real momentum.
MPL is expected to reach USD $350 billion by 2025, and the market is expected to grow at a prodigious CAGR of 48.2% between 2016 and 2024, but this amazing innovation has been concentrated in the developed world with its well-developed credit scoring system FICO. The developing world has not been able to participate due to lack of credit scores, minimal banking history, and small ticket loans, which made client acquisition tricky.
Pioneering fintech startups have been able to leverage your everyday smartphone to solve the developing market conundrum. Smartphones have taken over our lives and therefore data and information produced by each smartphone serves as an important piece of the jigsaw puzzle in understanding an individual’s habits. In the bigger scheme of things, MPL uses that information to develop products that help in addressing customers’ financial needs.
The expertise in using smartphones for generating credit data coupled with the ability to provide loans in the remotest location without requiring any physical banking infrastructure is changing the entire financial ecosystem in many developing countries. The ability of data scientists at these startups to utilize information from smartphones and other tech devices in a meaningful way has helped in halting the over reliance on FICO and similar credit scores.
Below are some indicators which can be collected from smartphones to analyze credit worthiness:
- Number of phone calls made.
- Internet Browsing
- Social media updates
- Prepaid top ups, mobile bill payments
- Location services to track a location of client
- Driving habits/gambling
How Smartphones Make the Lending Process Easy
According to the World Bank, there are approximately 2 billion adults who do not have any account with any financial institution. Almost 73% of the Southeast Asian population do not have a bank account. Thus, these lending startups are unlocking vast untapped markets which have been completely neglected by the brick-and-mortar banks. Startups like Branch and InVentures provide loans, and in return, the prospective borrower will need to grant access to their smartphones.
These startups use innovative algorithms to understand the individual, and based on that, determine their risk profile. For instance, the InVentures algorithm says people who call after the rate drops during a certain time of the day are low-risk borrowers. Many other such start-ups like Affirm, LendUp, and Zest Finance are using algorithms based on social media usage and online behavior. According to a report by Omidyar Network, around 580 million people without credit scores will benefit from such app-based lending.
The above charts show that smartphone usage and internet penetration are exploding across the world. Case in point: In India, there were 220 million (18% of the population) smartphone users in 2016, and that is expected to reach 340 million (28%) in 2017. Focus on digitization as well as growing smartphone penetration offers a unique opportunity to lenders to tap into phone and other utility payments databases for disbursing loans and evaluating credit worthiness.
Features provided by smartphone lending apps these days, which are key for marketplace lending, include:
- Optimized app for low-cost phones
- Streamline and simplified registration process while completing KYC requirements
- User-friendly user interface, which provides delightful customer experience
- Provision to upload document via smartphone and checking eligibility of loan in a few clicks
- Better rates and faster decisions on loans compared to banks
- Secure and Confidential
- Since companies use high-end predictive analysis tools to analyze data, need for credit bureau information is not necessary
- Once approved, funds are issued immediately and user can track the status instantaneously
Impact and Security Threat of Smartphone Penetration
Privacy experts might be incensed with the ability of lenders to scroll through a person’s smartphone and social media feeds, but upliftment from poverty will always be more important for a family in Nigeria as compared to outrage over what a lender can access on a borrower through Facebook. Also, lenders only look at metadata and have obviously no interest in status updates.
Since companies have almost complete access to user data, this also poses a security threat. Many countries have passed regulations to protect consumer interest, but there is a long way to go. Some of the key regulations are:
- Bringing all providers of digital credit under a regulatory framework thus creating a level playing field
- Mandating that individual data collected by lenders are subject to privacy laws
- Requesting that lenders institute measures to prevent customer over-indebtedness, be it through more flexible repayment terms or more extensive verification and credit checks
- Requiring that T&C be simplified and better communicated; for example, using summary displays before customers accept the loan and after loan disbursement accessible within the app, rather than by following a link away from the session.
How the Smartphone is a Game Changer
In China, fintech companies serve the same number of clients as major banks, and much of the credit goes to smart phones. India is also experiencing a fintech boom and now is the world’s third largest market for smartphones, with more than 300 million people expected to access the Internet via smartphones by 2017.
Many new platforms like M-Pesa and PAYTM provide a way to load cash on smartphones, and can be used to transfer or make payments bypassing legacy banking infrastructure. Fintech lenders are thus entering a golden period where digital money is the norm, and even citizens of third-world countries will be able to access credit and other financial products through their smartphones.
Written with Heena Dhir.