When you apply for a credit card or a loan in the United States, most banks and retailers will turn to one of the three major credit reporting agencies—Equifax, Transunion, or Experian—to get your credit score and decide if they’ll make you a loan.
In many emerging market countries, where the cash economy is more prevalent and credit is less common, far fewer people have any credit history, and thus have no credit score at all. The World Bank estimates that 61% of people in Latin America and the Caribbean are "unbanked," or outside of the formal financial system. When a family in the region’s growing middle class and wants to finance a refrigerator or a car—instead of saving cash for months or years—they may be denied the loan because they lack a credit history.
Over the last few years, many startup lenders have looked to use alternative data sources to help a broader population access the credit system, both in the United States and in the developing world (examples include Branch, Lenddo, InVenture, and AvantCredit). Most have written algorithms that take into account nontraditional variables, like social media use, cell-phone data, and even a person’s punctuation—to decide whether they’re a good credit risk. This is different than the popular practice in development of microfinance, which usually charges high interest rates to make loans to very poor people and is a very hands-on process.
What’s interesting is that traditional credit scorers are now getting involved in using non-traditional data sources. In Chile, the credit scoring agency Equifax is about to launch a partnership with the Cambridge, Massachusetts-based startup Cignifi that will use cell-phone data to provide a "Predictor Inclusion Score" for people with no credit history.
"It’s calibrated to be kind of like a credit score—and basically what this is doing is helping banks and retailers say ‘yes’ to people they always would have said ‘no’ to before," says Robin Moriarty, CMO for Equifax in Latin America. "A lot of our banking and retail customers want to make loans to a broader segment of the population."
Equifax and Cignifi, a startup that provides software for analyzing credit scores based on mobile phone behavior, have been developing the partnership for a few years. One of the biggest hurdles was figuring out how to make sure privacy and data security were strong and met all regulations. The program is entirely opt-in. So when a consumer wants to apply for a loan or line of credit, they give explicit permission for a lender to access their Predictor Inclusion Score. Through partnerships with telecom companies, Cignifi’s software can then calculate the score based solely on a person’s phone usage patterns (it doesn’t look at who they call, location, or the contents of their conversations or text messages). By law, the scores aren’t used for marketing offers.
"Someone who is on their phone a lot is likely to be more economically active. You can see things like consistency of usage over time—that indicates economic activity and predictable behavior," Moriarty says.
In the past, Equifax had looked at using other data sources like social media usage—but they found that, at least in Latin America, people who use social media are already in the middle class and tend to have sufficient credit scores. Moriarty says the program takes inspiration from similar initiatives in India and Africa, such as the Safaricom-run M-Shwari, which uses cell-phone data to make small loans. But to her knowledge, nothing similar has been tried in Latin America yet. They plan to expand to more countries after seeing how the program works in Chile.
"My expectation, in the future, is that you will see more sources of data used, and you will see many more different kinds of [credit] scores emerge. Lenders will make decisions about loans for individuals in ways you haven’t seen before."