Creative credit scoring models to improve financial inclusion
I know, if you expected a summary of The Banking Scene Afterwork on April 22, this title may be confusing, as credit scoring was not on the agenda. The official title was "Fintech for Good: Bright ideas and agility for a better future". Nevertheless, the creative ways of looking at credit scoring and the impact on society are what caught most of my attention. I am very grateful to Devie Mohan, CEO of Burnmark and the other attendees for all the insights.
Credit scoring has become such a multi-faceted area. Where initially I reasoned that creative solutions lead to higher credit distribution, which may be a dangerous evolution, increasingly more I understand that creative thinking not only allows more people to access credits. Still, at the same time, it can reduce the default risk instead of increasing it.
Fintech for good: yes, most banks need fintech
Truth be told, we started talking about how the pandemic hurt the classical neobank business model based on travel and leisure. We learned that fintech companies in e-commerce, prop-tech, insurance and anything to do with SME lending and funding suddenly peaked in activity and value.
More importantly, we learned that most bank struggle to deal with new challenges on their own. Either these banks miss the skillsets that fintech can bring in the loop, or they do not have the right frameworks, whether organisational or cultural, to benefit from these skills.
Sudden shocks required fast and sometimes immediate responses. Today, banks experience many of these shocks in parallel, and that is challenging. COVID-19 has accelerated developments and usage of digital banking, digital payments, remote working. On top of that, it stimulated governments and Central Banks to speed up the ESG agenda for a fairer society, resulting in more reporting and regulation.
These are merely the internal challenges. On top of that, many had customers impacted by COVID-19 that required tailored care. Creativity, empathy the capacity to think out-of-the-box were essential characteristics to fight these challenges.
As Devie said: "Banks have ideas, people in banks have ideas. But I think there is something lost in the processes, the regulations and compliance needed to run things that stifle that creativity within banks. So I would argue that creative ideas and bright ideas exist in banks in silos. But I think the implementation of those ideas into marketable products, that's more difficult for banks compared to start-ups."
To ensure a speedy roll-out of these creative solutions, flexibility and agility are essential. Let fintech companies work out bright ideas if you, as a bank, cannot build them fast. That way, you can put all your energy in the implementation.
Agreed, this does not apply to every bank. But luckily, we are past the times that banks felt they had to do everything themselves. Gone are those days.
Discovery bank: shared value proposition based on behavioural economics
As we discussed why most banks struggle to put their employee's creativity into music, Karen Smith shared the story of Discovery Bank, a spin-off of Discovery Group in South Africa (we touched on this before). Discovery Bank is "the world's first behavioural bank that is designed to help you improve your financial health and reward you for banking healthier".
What seems impossible for many big corporates became a reality for Insurer Discovery Group: to set up a team and build a full-fledged licensed bank from scratch with success. Like a fintech, their entire organisation is built on an entrepreneurial spirit, and unlike the traditional product owners at most banks, theirs are actuaries and data scientists.
Why? Because the basics of everything they do are finding new data insights to enhance their customer's financial wellbeing. As our guest shared: "The entire product focus is a reward system for good financial habits. These habits are rewarded in real-time, either through a decrease in interest rates on your credit or an increase on your savings, as well as other awards that they have, things like discounts on flights, etc. And these could become quite large and is not based on your income at all."
Every month, customers get new goals to either improve savings or insurances they have. As a result, and that is how we get to the topic of this blog: "their book base in terms of creditworthiness is one of the strongest in South Africa because they're constantly improving their clients so that they become more creditworthy.". Meanwhile, they are the seventh-largest credit provider in South Africa and have the lowest default risk in the country.
Community insights to improve credit scores and financial inclusion
Historically (or is it culturally?), credit scores a based on historical data like your salary, total level of debt, repayment history etc.… Thanks to the exponential increase in data gathering in the digital age, we see creative solutions popping up to provide a credit score to people that do not have sufficient credit history. In doing so, these providers improve financial inclusion: they provide access to financial products to people who did not access these products before.
Devie shared the example of Turkey: "the Turkish market is an excellent example of geographic data points used in credit scoring. What I mean is that Turkey is split in the middle between urban population rural population. All of the loan mechanisms are based on which province they come from and urban or rural. And that's a very geographic way of looking at it."
It gets even more interesting as we move to Asia and Africa, where credit scoring models include insights from social media to understand how the community looks at their neighbours. Devie: "The more we know the individuals and understand the community around individuals, the stronger the credit scoring gets. And ESG is one aspect of that, I think. The data related to how they live, how they behave, for example, if they recycle, if they believe in climate change, all of which can factor into credit scoring and being used."
Devie agreed that this kind of community-based credit scores might not fit every country or region, but it can be a real game-changer in some. It is an excellent example of how bright ideas deviating from the status quo can make a better future for many.
Does the industry need fintech to lift its efforts in creating a better world for human and society? Yes, they do. Even when they are strong enough to face today's challenges on their own, even if they have the creativity to find new solutions, even if they have no problem today because of the crisis, collaboration is the future.
Collaboration will further lift creativity. It embraces ideas from outside the inner circle. It keeps the minds and the eyes open to constantly find new ideas to enhance financial inclusion, stimulate financial behaviour, and stimulate people and businesses to more environment-friendly lives.