No Credit History? No Problem. Lenders Are Looking at Your Phone Data
No Credit History? No Problem. Lenders Are Looking at
Your Phone Data
By Olga Kharif
November 25, 2016 — 5:00 AM EST
FICO, Equifax stike partnerships to expand access to
loans
‘The way you use the phone is a proxy for the way you
live’
Financial institutions, overcoming some initial
trepidation about privacy, are increasingly gauging consumers’ creditworthiness
by using phone-company data on mobile calling patterns and locations.
The practice is tantalizing for lenders because it could
help them reach some of the 2 billion people who don’t have bank accounts. On
the other hand, some of the phone data could open up the risk of being used to
discriminate against potential borrowers.
Phone carriers and banks have gained confidence in using
mobile data for lending after seeing startups show preliminary success with the
method in the past few years. Selling such data could become a more than $1
billion-a-year business for U.S. phone companies over the next decade,
according to Crone Consulting LLC.
Fair Isaac Corp., whose FICO scores are the world’s
most-used credit ratings, partnered up last month with startups Lenddo and EFL
Global Ltd. to use mobile-phone information to help facilitate loans for small
businesses and individuals in India and Russia. Last week, startup Juvo
announced it’s working with Liberty Global Plc’s Cable & Wireless
Communications to help with credit scoring using cellphone data in 15 Caribbean
markets.
And Equifax Inc., the credit-score company, has started
using utility and telecommunications data in Latin America over the past two
years. The number of calls and text messages a potential borrower in Latin
America receives can help predict a consumer’s credit risk, said Robin
Moriarty, chief marketing officer at Equifax Latin America.
“It turns out, the more economically active you are, the
more people want to call you,” Moriarty said. “That level of activity, that
level of usage is what’s really most predictive.”
The new credit-assessment methods could allow more people
in areas without bank branches to open accounts online. They could also make
credit cards and loans more accessible and prevalent in some parts of the
world. In the past, lenders mainly relied on bank information, such as savings
and past loan repayments, to judge whether to let someone borrow.
Some of the data financial institutions are using come
directly from interactions with potential borrowers, while other information is
collected in the background. FICO’s partner EFL sends psychological
questionnaires of about 60 questions to potential borrowers’ mobile phones.
With Lenddo’s technology, FICO can check if users’ phones were physically
present at their stated home or work address, and if they are in touch with
other good borrowers -- or with people with long histories of fooling lenders.
“We see this as a good opportunity to explore that type
of data for risk assessment, as a viable means of extending financial
inclusion,” David Shellenberger, a senior director at FICO, said in an
interview.
Juvo’s Flow Lend mobile app uses data science and games
-- like letting users earn points -- to build real-time subscriber profiles, to
let C&W personalize lending criteria and provide immediate credit
extensions. Prepaid customers can request credit advances for airtime and data.
Denise Williams, a spokeswoman for C&W, didn’t immediately return a request
for comment.
Getting Permission
In most cases, consumers must grant permission for their
telecommunications records to be accessed as part of their risk assessment. One
reason it’s taken the credit-risk industry some time to work out agreements
with phone carriers or their representatives is because of negotiations over
how to best protect client privacy.
Companies are also concerned about making sure they don’t
make themselves susceptible to claims of bias. By checking phone records to see
if a credit applicant associates with people with a poor track record of
repaying loans, for example, lenders risk practicing discrimination on people
living in disadvantaged neighborhoods. In addition, to comply with the Fair
Credit Reporting Act in the U.S., a data provider must have a process in place
for investigating and resolving consumer disputes in a timely manner --
something that telecommunications carriers abroad may not offer.
Several large phone companies contacted by Bloomberg
declined to comment about whether they share data with financial institutions,
and few of the startups or financial companies were willing to disclose their
telecommunications partners.
Mirror of Life
Startup Cignifi, which helps customers like Equifax
crunch data on who phone users are calling and how often, works with phone
companies like Bharti Airtel Ltd.’s unit in Ghana. Cignifi scores some 100
million consumers in 10 countries each month, said Chief Executive Officer
Jonathan Hakim. Banks typically use such assessments alongside other
evaluations to decide whether to grant a loan. Airtel didn’t respond to
requests for comment.
“The way you use the phone is a proxy for the way you
live,” Hakim said. “We are capturing a mirror of the customer’s life.” His
company collects phone data -- such as whom the potential borrower is calling
and how frequently -- from partners like Airtel Ghana, and crunches it for
customers like Equifax, as well as marketers. It scores some 100 million
consumers in 10 countries each month, Hakim said. Banks typically use such
assessments alongside other evaluations to decide whether to grant a loan.
Cignifi always gets customers’ permission to use data, he said.
EFL’s questionnaire approach is already used by lenders
in Spain, Latin America and Africa. More than 700,000 people have received more
than $1 billion in loans thanks in part to its data, CEO Jared Miller said in
an interview.
EFL’s default rate varies by country, from low single
digits in India to low double digits in Brazil, Miller said. To account for the
risk, lenders in Brazil charge much higher interest rates, he said.
Startups like Lenddo, Branch and Tala have collected
several years’ worth of data to prove that their methods of using mobile-phone
data work -- and that customers flock to them for help. Started in 2011,
Lenddo, for instance, spent 3 1/2 years giving out tens of thousands of loans,
in the amount of $100 to $2,000, in the Philippines, Colombia and Mexico to
prove out its algorithms. Its average default rate was in the single digits,
CEO Richard Eldridge said in an interview.
The company stopped offering lending in 2014, and stepped
into credit-related services to financial institutions and banks in early 2015.
Embedded into banking mobile apps, it can collect data on users with their
consent. The company’s revenue is up 150 percent from last year, Eldridge said.
“The market is changing,” Eldridge said. “More and more
people are seeing examples around the world of how non-traditional data can be
used to enter into new market segments that couldn’t be served before.”
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