Closing the gap with alternative data
April 23, 2021
CredoLab's Chief Data Scientist on How Banks and Consumer Lenders Can Leverage Data Analytics for Business and Social Impact
Emerging markets in Latin America face a clear gap between social and economic classes. The incorporation of alternative data into the financial system could be presented as the possible solution to the lack of information of certain segments of the population, favouring financial inclusion and collaborating in political and economic decisions. Would alternative data be the expected answer to solve economic differences?
The Latin American region presents a marked rift between classes that is affected by the lack of access to the economic circuit of a segment of this population that currently find themselves unbanked. Despite the fact that a considerable percentage of them could be potential bank clients, by not having a traditional credit history, they are excluded from the economic system, thus widening the social gap.
Political and banking institutions' decisions depend on data that, given the complexities of LATAM, are often unreliable or very difficult to obtain. Faced with the region's difficulties, economic institutions - mainly fintech ones - have made a rapid turn in the population assessment process.
In a market where a large percentage of citizens are unbanked, the challenge is greater. However, there are potential clients that the market has not yet detected. Faced with the lack of traditional data to perform a credit evaluation, alternative data with artificial intelligence is presented to this challenge as the possible solution for the generation of an alternative credit score.
Alternative data, obtained through metadata from smartphones, such as digital transactions, employment information, payment behaviors, and data obtained from social networks and satellites, allow financial companies to generate a credit score for people that do not have a traditional track record. The reliability of this alternative data favors the incorporation of a segment that is marginalized, thus allowing not only financial companies to increase their client base, but also benefit financial and social inclusion.
In turn, it enables companies to reduce the credit risk rate. This is due to the daily artificial intelligence evaluations that allow companies to define customers' behaviour patterns and anticipate them. With a much in-depth knowledge of this new segment, it is now possible to understand their needs, adapting financial decisions and generating customized credits for each person.
There is no doubt that alternative data is a great solution to the Latin America economic gap. By making a proper use of its benefits, and by making a deeper analysis about peoples payment behaviour, it is possible to detect those who are reliable to receive a loan, reducing the gap between banked and unbanked people. In this way, financial inclusion is also transformed into social inclusion.