What Are They?
A credit score for an individual is determined by several factors in their borrowing history. However, what would be your credit score if you’ve never taken a loan? How would banks evaluate you?
The solution is Alternative Credit Scoring. For example, instead of using payment history, lenders use your digital footprint to ascertain whether they should loan out money. This different system of credit scoring gives lenders access to a new population of people who are underbanked. This new target group won’t be imposed with the previously high interest rates because lenders, now, would be far more confident with the additional information and data they have on the borrower. In addition, through the help of advanced AI/ML algorithms that use digital and social data, lenders will also have a tool at their disposal to better judge an applicant’s stability and ability to pay back the loan.
P2P or Peer-to-Peer lending is an existing system that helps individuals obtain loans by removing the middleman of financial institutions and working directly with individual lenders. This, in some cases, can be considered “social lending” as it provides a door to the underprivileged for financial opportunity. Normally, such interactions are done over websites that provide a platform for these relationships. Each loan is coupled with an interest rate dependent on an applicant’s creditworthiness.
Why Are They Important?
Alternative Credit scoring provides a variety of benefits including improved assessment of applicants for loans, increased market reach, and an enhanced customer experience. What does all this mean?
As it relates to improved assessment, the major difference from other methods of evaluating credit scores is that ACS uses CURRENT metrics. This allows lenders to evaluate borrowers’ patterns at the point of request rather than previous habits that may have changed due to financial maturation.
In addition, it also has social implications by providing lenders the opportunity to grant loans to those who are part of the unbanked population. Based on their digital footprint and real-time payment patterns lenders can now determine whether to provide loans to those who don’t have a credit history. If, for example, an applicant’s spending pattern suggests that most of their income is spent on luxury goods instead of necessities, their credit score would decrease based on ACS.
Furthermore, it can enhance the experience of a customer with a lender. With the growing automation of the process of underwriting loans, customers won’t have to worry if lenders may make errors in choosing certain interest rates or if their rates are based on bias.
In today’s digital age, most P2P lending is done over websites designed to connect borrowers and lenders. Similar to Alternative Credit Scoring, P2P lending not only helps lenders by providing them higher returns relative to other investments but also provides borrowers financial access to loans that were previously deprived to them. Furthermore, more borrowers would like to participate in P2P lending networks because, due to competition between lenders, the interest rates are significantly lower in comparison to commercial banks.
With this information in mind, an interesting question arises: what is the use of these fintech concepts within established microlender networks?
Application
Microlender Agent Networks are essentially networks of P2P lenders who work together to better the economic status of their community. The number of borrowers varies based on their creditworthiness. Usually, people who are new borrowers are grouped together when starting a small business, so it establishes an environment of mutual motivation towards repayment. However, with the introduction of Alternative Credit Scoring, groups may no longer be needed to offset risk as lenders now have additional data from useful metrics.
Though Microlending, in general, is considered as an aid to the poor in third-world countries, it has first-world application as it can help the 14.1 million adults in America who are currently unbanked or underbanked. People, with no credit history, fit in either of these categories primarily because they seek loans below a bank’s minimum or can’t obtain credit at all. Both problems of which can be tackled by the further integration of Alternative Credit Scoring and P2P Microlending networks.
Conclusion
When considering the future of these Fintech Concepts, there is no limit to its socioeconomic applicability, potentially helping millions of unbanked citizens. What we must do now is grow these microlending networks by recruiting more agents and introducing them to existing nonprofits, so that we can utilize ACS and P2P to their fullest.
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