The problem with credit and how to fix it

See if you can spot the problem with how we provide individuals and businesses with access to credit:

We get credit by having detailed credit histories. In order to develop detailed credit histories, you need to use credit.

If that seems a little circular, then you’ve spotted the problem.

Around the world, millions of potentially creditworthy people can’t access credit — not because they have bad credit histories, but because they have no credit histories. These ‘thin-file’ applicants include legal migrants, first-time borrowers, young adults, and the 2 billion people who have no access to formal financial services.

This problem prevents entrepreneurs from launching businesses or parents from sending their children to school. And on top of that, it also costs banks quality customers.

Fortunately, fintech startups around the world are doing something about it. Writing in CIO Review Magazine, Accion CEO and President Michael Schlein details “How Data is Changing Credit,” and discusses how “the explosion of personal data created by the proliferation of mobile phones” can help lenders “better understand [their] customers and predict their credit behavior.”

Alternative data includes a variety of new information, including social media, internet usage, phone records, and bill payments. Combining it and analyzing it in new ways can provide valuable insight into how customers act — even if they’ve never had credit before.

The op-ed draws on Accion’s experience studying and investing in alternative data startups. Recent investments in Aire and Tienda Pago underscore how important we think this new technology is.

And it’s not just that we have ‘skin in the game’ when it comes to alternative data, either – our team has personal experience with what it’s like to be a ‘thin file’ customer. Accion Venture Lab’s Nancy Widaja recently discussed what it’s like to have a zero credit score, despite the fact that she’s paid off a car loan and mortgage in Indonesia.

Using alternative data to change credit is one way we’re harnessing digital trends to help the world’s financially excluded.

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