According to a report (paywall) by the Wall Street Journal, tech start-ups are revolutionizing the lending industry by finding alternative ways to judge someone’s credit worthiness in the case of people who’ve never had a loan, credit card, or other revolving credit accounts. Instead of looking at payment histories that don’t exist, the start-ups take a look at the user’s cell phone habits.
An app is installed on the potential borrowers phone and then authorized to collect all sorts of data from it. Branch is one of the companies involved in this. Founded by former Kiva (a microlending platform focusing on the developing world) CEO Matt Flannery, Branch promises to help users gain financial independence. Flannery said, “These are people that don’t have a credit score. Your digital trail can establish your financial track record.” From Branch’s website:
Branch collects data from your phone when you log in to our app. This includes information about your device, SMS logs, call logs, and contact lists. We use this information to assess your creditworthiness and provide a seamless experience when applying for a loan.
One example of a determination made based on the data collected was that people who waited until evening, when calls were cheaper or even free to make, are more likely to be good borrowers. Frugality is a virtue in the eyes of the lender, whose main concern is that the borrower have money to pay them when the time comes. This observation was made by InVenture, another mobile lending service.
Most interesting was Branch’s observation that users who were gamblers – a determination they can make from text messages and calls to gambling companies – were more likely to repay their loans than were those who abstain from gambling. This goes against the stereotypical gambler hiding from his bookie and speaks to the way different types of people view money.
According to the WSJ, many people choose to go with InVenture or Branch in order to improve or start businesses, and although many could use banks, they prefer the lower interest rates of the applications, not to mention the ease. Getting a loan from a bank is a hassle worldwide, it seems, regardless of one’s willingness or ability to repay.
Microlending is generally a very exciting topic for entrepreneurs though mainstream houses of finance tend to view the developing world as risky. InVenture and Branch are betting on the opposite being true, and InVenture CEO Shivani Siroya believes the data will tell that story. That’s what entrepreneurs are good at: finding better ways to do things that are expensive to do and finding ways to do what others are unwilling to do. Perhaps mainstream banks forget that these borrowers are able to get a business going, and often enough could be the first in their category. In a market sense, that provides first mover advantage. Which means likely profits, which means repayment is more likely.
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