Omidyar Network on 26 October 2015, released – Big Data, Small Credit: The Digital Revolution and Its Impact on Emerging Market Consumers – a research report that analyzes a new category of technology enterprises that are disrupting the traditional way of assessing consumer credit risk in emerging markets.
Using non-financial data—such as social media activity and mobile phone usage patterns—complex algorithms and big data analytics are delivering a quicker, cheaper, and more effective credit assessment of consumers who lack credit histories and were invisible to lenders before.
“The financial services industry is on the brink of a new era, where harnessing the power of digital information to serve new segments is becoming the new normal,” says Mike Kubzansky, Omidyar Network Partner.
“Companies in the ‘Big Data, Small Credit’ space are an example of how this paradigm shift can unlock an entire new pool of customers for formal lenders, while helping consumers in emerging markets get the services they need to improve their lives.”
The report explores how the digital revolution and the resulting explosion of data have converged to significantly enlarge the addressable consumer credit market for traditional and alternative lenders in developing markets. In India alone, this new approach to risk assessment can potentially bring between 100 and 160 million new customers to the consumer credit market, which would mean tripling the current addressable market for retail lenders in the country.
“Big Data, Small Credit” also delves into the opportunities and challenges ahead for these new businesses. It shares the results of an in-depth consumer survey with early adopters in Kenya and Colombia by exploring pressing questions around privacy and trust, and provides recommendations to key stakeholders on how to reap the benefits of this new, evolving field.
“Listening to the early adopter consumer is at the crux of realizing the potential of the ‘Big Data, Small Credit’ business,” says Arjuna Costa, Omidyar Network Investment Partner.
“Our survey shows that consumers in emerging markets have a clear understanding of the privacy tradeoffs this type of solution entails and seven out of 10 are willing to share information they consider private in order to get a loan.”
The consumer survey found that early adopters can articulate, differentiate between, and rank different types of private information. They are also younger, stably employed, and more educated and tech savvy than the average population of both surveyed countries—an attractive consumer segment for any lender. However, when faced with emergencies and cash-flow challenges, the large majority still resort to an informal source:
– 88 percent of respondents in Kenya and 59 percent in Colombia go to family and friends for loans
– 76 percent of respondents in Kenya and 34 percent in Colombia use other informal credit sources, such as pawnshops and loan sharks
While the report indicates that it is still early days for this new business and most providers are still experimenting with algorithms, models, and data sources, both the economic and social benefits of this approach can already be ascertained. In the world’s six biggest emerging economies including China, Brazil, India, Mexico, Indonesia, and Turkey—this new technology has the potential to help between 325 and 580 million people gain access to formal credit for the first time.
However, in order to capitalize on this opportunity, the report recommends a concerted industry effort to build an ecosystem in which these enterprises can continue to develop.
In particular, it encourages incumbents in the financial services sector to enhance their existing risk assessment platforms with these new technologies, and advises policymakers to balance the need for consumer protection with the imperative to not regulate this nascent industry too soon.
As part of its financial inclusion initiative, Omidyar Network has been a long-time investor in solutions directed at reducing the high cost of credit assessment in emerging markets, including early-stage investments in pioneering companies in the space, such as Lenddo, Cignifi, and RevolutionCredit.
The full report can be downloaded at: www.omidyar.com