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Redefining Creditworthiness in the Philippines

February 12, 2021

Lending has long been a universal struggle in the Philippines, especially for the estimated 70% of the adult population currently with limited access to financing. This demographic is prone to seek alternative finance options, no matter the risks. But as we enter the new year, change is underway. Digital-only banks have announced their entry to Philippine shores, bringing with them easier access to attractive interest rates and rapid approvals. Beyond these offerings, their presence will likely shake up the traditional banking and finance scene for good.

Traditional banking scene in the Philippines


The pandemic has forced legacy banks to accelerate their digital transformation plans. Many have rolled out digital capabilities over the past year to better serve the everyday needs of Filipinos stuck in quarantine. These upgrades, however, remain insignificant to those with no credit history, as traditional banking establishments remain under-equipped and unmotivated to lend money to vulnerable groups who lack credit scores.

In the Philippines, only 9% of the population uses credit cards as of 2019. It’s not uncommon for Filipinos to explore financial alternatives to attain loans. Oftentimes, these alternatives come with hefty interest rates, drowning loaners in debt. (The) 5-6 lenders, for instance, were prevalent before the government crackdown, offering individuals loans at 20% interest over an agreed period of time. For the underbanked hoping to save their business from bankruptcy or pay off a family member’s medical bills, such weighty interest rates are no disincentive.

Financially inclusive lending options are needed to prevent Filipinos from falling into such schemes — and more are conveniently underway. With the fall of credit card usage comes the rise of digital-only banking. Today, 10.2 million Filipinos, or 15% of Filipino adults, use digital-only bank accounts. According to the central bank, at least 50% of payments will likely shift online in two years, and neobanks will serve 51.4 million customers in the Philippines by 2025. While the potential of neobanks is promising, many in their early stages still have a long way to go in terms of offering services that are financially inclusive for all.

Alternative credit scoring technologies change the game


Neobanks promise affordable, easy-to-use products and services, be it for payments, savings or credit. When it comes to lending, however, many still fail to provide fully inclusive services. There’s no denying the importance of credit scores in determining whether an individual is deserving of a loan. However, with recent innovations in the fintech space, banks can now opt for alternative approaches to define creditworthiness.

Alternative credit scoring technologies are opening doors for those with minimal or nonexistent credit scores. These technologies run algorithms that study different datasets, ranging from social media to smartphone data, to calculate one’s creditworthiness. When it comes to social media, there’s admittedly leeway for users to fabricate data. For instance, new profiles can be built, with content specifically uploaded to portray one as a financially responsible individual.

Smartphone data, on the other hand, is less malleable. It utilizes non-intrusive privacy-consented algorithms to detect predictive mobile behavioral patterns. Such behaviors are less straightforward to falsify, making the approach a more honest option for neobanks to consider. In a nation like the Philippines with high mobile penetration, such alternative credit scoring technologies will further enable Filipinos to attain good credit scores and ultimately utilize banking services they would otherwise be unlikely to access.

Achieving success in the Philippines


As more neobanks look to set up shop in the Philippines, numbers of those with limited access to financial options in the country are expected to drop between 50% and 20%. We have high hopes for the debut of the Philippines’ first digital-only bank this year. However, to sustain its success in the country, collaboration with fintech partners is key.

Working hand in hand with fintech experts can help new entrants steer clear of pitfalls often encountered by neobanks around the world. While fintechs can empower neobanks to rightfully identify deserving consumers at a controlled cost of risk, success depends on more than finding the right partners. Government efforts and policies must be put into place to support and hone the fintech scene in the Philippines. Through these combined efforts, we look forward to an elevated banking and finance industry, one that is financially inclusive for all.

This article originally appeared in Back End News.