Facilitating access to finance: alternative data is the key

Despite the rapid expansion of financial services, a significant proportion of individuals and small businesses remain financially underserved. This group encompasses “thin file” customers, who have limited or no credit history, women, small and medium enterprises (SMEs), and young demographics in emerging economies.  

The key to ensuring fair and easy access to finance for these populations is through ethical acquisition and utilisation of alternative data, such as behaviour on previous mobile or small loans, telecom and utility data, data on related parties and self-reported data, all ideally obtainable through credit bureaus. Coupling this with financial education initiatives for the underbanked populations and the development of unbiased predictive models, we can help to significantly enhance financial inclusion and expand access to finance. 

Why do emerging markets need greater access to finance? 

57% of the African population don’t have access to a traditional bank account and large numbers of consumers can’t provide the financial data required for a credit score. In most cases, women face further barriers when it comes to accessing loans. These populations often lack access to financial services because they don't have enough formal data, they face bias, or they are discriminated against.  

SMEs form the backbone of the global business landscape, representing about 90% of businesses. Unfortunately, they are also less likely to have access to formal bank loans.  

With rising inflation and the global economic challenges of recent years, countries should be putting the necessary measures in place to protect their economy. Providing individuals and small companies with easier access to finance means they can grow their businesses and actively participate in the local economy, creating a healthier and stronger financial ecosystem.   

Power of alternative data 

Credit scores have traditionally been derived from data obtained from regular consumer bank transactions or prior payment records. Those without these financial facilities are inadvertently disadvantaged when applying for loans. 

However, a wealth of alternative data can bridge this gap. The scope extends from someone’s ability to pay their phone and utility bills to data from fintech apps and even social media, each serving as a valuable indicator for lenders to determine loan eligibility. 

We’ve already seen considerable progress with the use of mobile payment apps to provide this crucial data needed to make informed lending decisions. In Kenya, for example, financial inclusion has increased from 26% in 2006 to 83% in 2021 with the use of mobile banking apps as a gateway to financial inclusion. These methods can be used as an example to other countries to demonstrate how tapping into alternative data can widen access to finance in emerging economies.  

Communication is key  

Clear communication between credit bureaus and regulatory bodies is crucial to ensure the correct regulatory framework is in place to allow alternative data to be shared. There also need to be regulations in place to guarantee that alternative data is used and shared in a safe and ethical manner. Through better communication between financial institutions and regulatory bodies, people’s data can be used in the right way to allow lenders to make informed lending decisions. 

Harnessing the power of technology 

With such a high volume of alternative data available, financial institutions also need the correct systems in place to organise and analyse data points in an efficient and accurate manner.  

One way of doing this is through AI and machine learning models. They can be used to analyse and extract actionable insights from a wide range of unstructured data points drawn from alternative data sources. Moreover, financial institutions need to establish robust model management frameworks to oversee, control and deploy a wide range of algorithms constructed on alternative data. 

Empowering consumers through financial education 

Organising financial education programmes designed specifically for underserved communities can enlighten consumers about their options and map a path to financial inclusion. With growing choices for consumers who have limited credit data, it is the responsibility of governments and financial institutions to provide the correct information and advice to allow consumers to develop the skills and knowledge to make informed decisions.  

The use of alternative data, accessible through credit bureaus, is a powerful tool to facilitate access to finance globally. However, there are several steps which need to be taken to ensure this data is securely collected through credit bureaus, correctly harnessed and shared only with the right parties. By combining the latest AI and machine learning models with effective regulatory communication and education programmes for consumers, financial institutions can use this data more effectively to increase financial inclusion and create more resilient economies.