By Paul Randall, Executive Director from credit risk management experts Creditinfo
According to the World Bank’s Global Findex Database 2017[i], 69 percent of adults worldwide have an account, either with a financial institution (i.e. bank account) or a mobile money provider. Financial services are the bedrock of a nation’s economy, funding and providing access to other critical services including health, education, entertainment and business. Yet the stark reality is that 69 percent is too small a number. A whopping 1.7 billion adults across the globe remain ‘unbanked,’ with no bank accounts and no access to formal finance.
Most, if not all, of these unbanked individuals live in the developing world, in regions such as Africa, India and China. What’s more, an additional 200 million micro-, small- and mid-sized businesses in growth markets lack access to savings and credit, according to a recent McKinsey report[ii]. A lack of banking infrastructure in these developing markets has led to significantly lower numbers of formal finance. This lack of formal finance creates a poverty trap that is hard to climb out of. Poor people around the world are relying on cash to pay their utility bills; budding entrepreneurs are overlooked for loans because of a lack of credit history.
But the outlook needn’t be so bleak. The good news is the unbanked population is slowly diminishing. But how can we close the financial inclusion gap even more swiftly, on the road to universal financial access in the not too distant future? The answer lies in the innovation that both incumbent and emergent fintech companies are bringing to the credit risk management table.
By changing current approaches to credit lending, and providing those with lending power with a new mentality, and the infrastructure required to make better decisions, we can tap into an unbanked and underbanked population to the benefit of economies globally. Here, we’ll take a look at what this road to financial inclusion looks like in reality, particularly for developing regions such as Africa – and it’s more practical, achievable and realistic than you might initially think.
Potholes in the road to financial inclusion
Consulting firm Accenture has estimated that bringing unbanked adults, as well as businesses, into the formal banking sector could generate about $380 billion in new revenue for the financial services sector. With $380 billion to gain, why wouldn’t players in the industry want to unlock that potential?
A report by the World Bank[iii]outlined the importance of infrastructure in support of economic growth. This is specifically pertinent for developing markets, where access to infrastructure, or the ability to build a banking infrastructure from scratch, is often just out of reach.
The historical infrastructures designed to manage corporate loans and consumer savings are ill-equipped for the challenges generated by both the substantial increases in volume of credit and the specific requirements of an unsecured lender. This lack of infrastructure is especially poor for the initial risk assessment, where much of the process is manual.
The development of a robust banking infrastructure, underpinned by government and private sector investors and the participation of local and foreign businesses, is imperative in unlocking the huge population of unbanked and underbanked individuals in developing regions.
In a recent blog by The Brookings Institution[iv], a US non-profit public policy organisation, Africa was proclaimed as the continent of the future. For some years now, the World Bank has driven an initiative to promote the installation of credit bureaus across Africa and other developing regions, with a view to facilitating lending to consumers and small businesses.
If you build it, they will lend
The International Finance Corporation’s(IFC) Africa Credit Bureau Program supports economic growth on the continent by providing the advisory services, infrastructure, credit risk management technologies and support to central banks and other private sector stakeholders in order to build a banking backbone that supports increased access to formal lending. Part of this program involves the development and implementation of credit information sharing, supplemented by automated application processing systems so that lenders can make more informed decisions more quickly, and at scale.
These credit bureaus play a crucial role in creating the infrastructure that has been so severely lacking, by allowing banks to make lending decisions based on quantitative models of risk. This means banks and other lenders can provide access to financial services at a lower cost, to more people, while also reducing risk. However, the conundrum in Africa lies in providing access to financial services to individuals who have very little or next to no credit history, thereby making it difficult for those credit bureaus to provide an accurate picture of solvency to lenders.
You can teach an old bank new tricks
“When there’s little information, then there’s little financing,” said Luz Maria Salamina of the IFC.
Traditional lending and underwriting methods typically screen out the huge pool of ‘thin file’ customers that reside in developing markets like Africa. These are customers without a credit history, or one that’s too small for traditional risk analysis. Thin file companies are typically very poor – they’ve been ignored by the formal sector, and as such tend to pay for services with the little cash they have. So, without information on the billions of these individuals currently without access to finance, the financing stops.
Enter fintech disruptors, who are facilitating change in the credit lending industry by helping banks to tap into and use new sources of data that can unlock both the large pool of thin file customers and, by extension, the wider unbanked population. Some of the largest investors into fintech companies are banks, with some mainstream lenders now acquiring, adopting and developing the new technologies that these fintechs have created. What’s more, established, best-in-breed credit bureaus have adopted these fintech techniques, providing banks with a single source of data, whether that’s through a traditional credit file, or a digital file of aggregated data.
These fintech companies have made an excellent job of mining new data sources from social media, mobile transactions and trade data. Amazon is an example of this new way of thinking – the tech heavyweight used its vast data source to lend $1bn to SMEs over the last 12 months. Companies like Amazon have been able to teach banks new tricks when it comes to making better decisions more quickly, particularly when it comes to thin file customers.
Better the debtor you know
Normally, credit histories are a record of a borrower’s ability to pay back debts. Sources of data include banks (does Bob pay his bills on time?), credit card companies (how many credit cards does Bob have?) and collection agencies (has Bob previously defaulted on any debt, such as loans?)The data is combined, an algorithm is applied, and the subsequent report details how likely it is for that particular borrower to pay back or default on debt in the future. As banks and fintech companies join forces to harness innovation, they are unlocking new data sources, which include the new concept of psychometric testing to fill in the gaps on thin file customers. While it’s true that not everyone can currently access credit, everyone has a personality.
There are now new, innovative solutions for credit lenders to measure the risk of potential customers who may have been overlooked for formal finance in the past, by assessing their core personality. Just like credit bureau data, where millions of raw variables are split into segments such as default, early stage and revolving arrears, or credit card performance, so personality data is split into segments in a similar way.
By uniting psychological models with traditional risk analytics, lenders can reduce risk with existing customers and start new relationships with prospective customers, thereby increasing affordable access to financial services products. New data can be created on individuals’ personalities and their likely behaviour, complementing existing risk assessment processes to produce a rounder picture of an individual.The psychometric test can also be expanded to business loans, allowing more companies to start and expand.
Mobile lending as a litmus test for change
Smartphone and mobile money data can also be harnessed to open up the financial services sector to both individuals and businesses in Africa. As an example, Kenya has an intrinsic entrepreneurial spirit, from informal shops and roadside stores to sophisticated web-based start-ups. However, as with other emerging economies, a high percentage of Kenyan start-ups fail within the first three years of operations, with working capital identified as one of the main reasons for failure. Entrepreneurs who previously struggled to obtain formal finance due to a lack of credit history now have an opportunity to benefit from mobile lending solutions.
With the number of African citizens with access to smartphones increasing, start-ups have an opportunity to widen their customer base through a host of digital platforms, reducing the overall overheads, whilst being able to better manage their business, finances and inventory. Over the coming years, we’ll see various regions in Africa benefitting from the growth in mobile lending, with the result being those loan records being stored within credit bureaus.
The World Bank’s goal is that, “by 2020, adults who currently aren’t part of the formal financial system are able to have access…as the basic building block to manage their financial lives.” The road to universal financial inclusion might be peppered with hurdles, but these are hurdles that can be overcome, through collaboration, open-mindedness and a new approach to the credit risk management industry.
Financial inclusion isn’t just about financing businesses and, for the cynics amongst us, creating more debt. It’s about levelling the playing field globally, giving everyone access to the services they require and, ultimately, giving people the opportunity to lead a better life; a chance to climb out of poverty and into a society that is fair and creates ‘wealth’ in its many shapes and forms.
FSS and India Post Payments Bank AePS Partnership Advances Financial Inclusion in India
New Delhi, January 12th,2020: FSS (Financial Software and Systems), a leading global payment processor and provider of integrated payment products, today announced partnering with India Post Payments Bank (IPPB) to promote financial inclusion among underserved and unbanked segments. As part of the collaboration, IPPB will use FSS’ Aadhaar Enabled Payment System (AePS) to deliver interoperable and affordable doorstep banking services to customers across India.
FSS’ AePS solution combines the low-cost structure of a branchless business model, digital distribution, and micro-targeting that lowers acquisition costs and improves reach. This strategic partnership offers significant opportunities to bring millions of unbanked customers into the financial mainstream. Currently, there are nearly 410 million Jan Dhan accounts in India. A primary reason for low usage of banking and payment services is the challenge of accessibility in rural areas and the cost of maintaining active accounts — including transaction and transport— outweigh the benefits. In rural and peri-urban areas, the average time to reach a banking access point potentially ranges between 1.5 and 5 hours, compared with the average of 30 minutes in urban areas.
Leveraging its vast network of over 136,000 post offices, and 300,000 postal workers, IPPB has been setup with the vision to build the most accessible, affordable, and trusted bank for the common man in India to deliver banking at the customer’s doorstep. With the launch of AePS services, IPPB now has the ability to serve all customer segments, including nearly 410 million Jan Dhan account holders, giving a fresh impetus to the inclusion of customers facing accessibility challenges in the traditional banking ecosystem.
Speaking on the tie-up, Mr.Krishnan Srinivasan, Global Chief Revenue Officer, FSS said, “We are proud to be IPPB’s technology partner in this monumental nation-building exercise. The collaboration is evidence of FSS’ deep payments technology expertise and commitment to bringing viable, market-leading innovations that promote financial deepening. FSS’ AePS solution combined with IPPB’s expansive last mile distribution reach empowers citizens of the country with a range of digital payment products and advance India’s vision towards less-cash economy.”
“Through the vast reach of Department of Posts network along with the advent of the interoperable payment systems to drive adoption, IPPB is uniquely positioned to offer a range of products and services to fulfil the financial needs of the unbanked and the underbanked at the last mile. Having launched AePS services, the Bank has become the single largest platform in the country for providing interoperable banking services to customers of any bank. The strategic partnership with FSS provides us with an opportunity to expand the portfolio of financial services and improve customer experience whilst maintaining operational efficiency, thus building a digitally inclusive society,” said Mr. J. Venkatramu, MD & CEO, India Post Payments Bank.
The infrastructure created by IPPB addresses the accessibility challenges faced by customers in the traditional banking ecosystem. It fulfils the Government’s objective of having an interoperable banking access point within 5 KM of any household and creating alternate accessibility for customers of any bank.
The operation of FSS’ AePS solution is based on agents performing transactions on behalf of customers using a tablet, micro-ATM or a POS device. The system is device agnostic and can accept transactions originating from any terminal. Customers of any bank can access their Aadhaar-linked bank account by simply using their fingerprint for cash withdrawal, balance enquiry and transfer of funds into an operating IPPB account, right at their doorstep. FSS’ AePS exposes APIs to third parties to develop an expansive services ecosystem and extend a broad suite of financial products and tools including micro-insurance, micro-savings, micro-finance, mutual fund investments, enabling the bank to further services adoption among low and moderate-income consumers.
FSS (Financial Software and Systems) is a leader in payments technology and transaction processing. FSS offers an integrated portfolio of software products, hosted payment services and software solutions built over 29+ years of experience. FSS, end-to-end payments products suite, powers retail delivery channels including ATM, POS, Internet and Mobile as well as critical back-end functions including cards management, reconciliation, settlement, merchant management and device monitoring. Headquartered in India, FSS services leading global banks, financial institutions, processors, central regulators and governments across North America, UK/Europe, Middle East, Africa and APAC. For more information visit www.fsstech.com.
About India Post Payments Bank
India Post Payments Bank (IPPB) has been established under the Department of Posts, Ministry of Communication with 100% equity owned by Government of India. IPPB was launched by the Hon’ble Prime Minister Shri Narendra Modi on September 1, 2018. The bank has been set up with the vision to build the most accessible, affordable and trusted bank for the common man in India. The fundamental mandate of IPPB is to remove barriers for the unbanked & underbanked and reach the last mile leveraging a network comprising 155,000 post offices (135,000 in rural areas) and 300,000 postal employees.
IPPB’s reach and its operating model is built on the key pillars of India Stack – enabling Paperless, Cashless and Presence-less banking in a simple and secure manner at the customers’ doorstep, through a CBS-integrated smartphone and biometric device. Leveraging frugal innovation and with a high focus on ease of banking for the masses, IPPB delivers simple and affordable banking solutions through intuitive interfaces available in 13 languages.
IPPB is committed to provide a fillip to a less cash economy and contribute to the vision of Digital India. India will prosper when every citizen will have equal opportunity to become financially secure and empowered. Our motto stands true – Every customer is important; every transaction is significant and every deposit is valuable.
Be Future-Ready: The Case for Payments as a Service (Paas)
By Barry Tarrant, Director, Product Solutions, Fiserv
Over the years, financial institutions have faced a myriad of changes in regulations, technology and customer expectations. Banks are now having to deal with the competing demands of maintenance and compliance on the one hand, and the need to innovate and deliver value-added services on the other. The balance of effort is increasingly consumed by the former with the share of investment in innovation and value generation being squeezed.
COVID-19 has changed customer behaviour, which will accelerate the need for more digital innovation, adding further to the demand on technology resources that are already stretched to the limit. While future investment plans may remain uncertain, banks need to consider several factors for their technology strategy, such as efficiency, where to invest and how to reduce capital expenditure.
It is apparent that the traditional approach to implementing and updating technology is no longer sustainable in the long-term.
The true cost of outdated technology
Maintaining technology has always been a challenge. What makes it more important now than ever is that innovation expectations have become far greater and exist on multiple simultaneous fronts. Today, there is more demand for product innovation, alongside the need to deliver consistently across multiple channels. On top of this, banks are facing structural changes, such as the convergence of payments.
Faced with this combination of imperatives, many banks are finding that continuing to maintain their payments technology in-house is no longer the most viable option.
Banks that persist with existing in-house infrastructures are in many cases spending large sums just to keep up, with little left for innovation. This can put them at a distinct disadvantage in today’s digital environment, where challenger banks and fintechs are fully embracing tools like the cloud to optimise operations while delivering truly transformational customer experiences.
Maintaining technology can be quite costly, and leveraging shared payment innovation can result in notable cost savings. Additionally, there are savings to be had in the areas of capital costs, opportunity costs, regulatory or payment scheme compliance costs, and the inevitable one-off costs from technology or infrastructure upgrades.
And as the options available for customers to initiate payments across card and non-card payment rails increase, this will drive a convergence of the technology that supports the processing of those payments, further increasing the demand for change.
In this environment, migrating to an alternative technology strategy, such as PaaS, can be a strategic and cost-effective decision.
One solution to mitigate the risks and costs associated with maintaining technology is to outsource payments activity to a PaaS provider. The most obvious advantage here is cost reduction. However, there are many other positive and significant financial benefits that can be realised in terms of reduced capital expenses and the associated effects on balance sheet and free cash flow. This is particularly important in the current environment as capital investment comes under even more scrutiny.
Running a robust platform is a PaaS provider’s primary business, whereas for a bank it is just one of the many areas in which it has to invest. A PaaS provider is compelled to continually reinvest to ensure their technology never stands still long enough to become outdated, while also recruiting high-calibre personnel to support and advance it.
Geographical scale can also add value and increase opportunities for innovation. A PaaS provider with clients around the world sees and delivers innovation globally, which can be redeployed elsewhere rapidly and at a lower cost than custom development. Also, a global processing network can serve as a worldwide payments intelligence network, detecting trends, such as new payment types, consumer payment behaviour and cyberthreats.
One further consideration is how payments have become increasingly commoditised in recent years. As traditional revenue streams from payments have declined, it makes even less financial sense to retain payment processing in-house. By adopting PaaS and benefiting from the associated cost savings, retained payment margins can be maximised, simultaneously freeing up resources that can be diverted to innovation and value-added activities, such as enhancing customer experience and building the franchise.
Debunking the myths
Despite the compelling business case for banks to adopt PaaS, some remain reluctant to do so because of various myths. One example is the belief that outsourcing data is inherently risky. The reality is, in fact, the opposite. PaaS providers have the scale, resources and procedures to address and invest in key priorities – for example, cybersecurity. Keeping things in-house can actually create greater data security risk if resource constraints are an issue.
Budgetary considerations aside, experience and specialist tools are also major points of difference here. A typical bank IT manager might experience two or three major transition projects in their entire career. In contrast, teams at a PaaS provider collectively will have experience successfully delivering many major transformation projects, and will have also developed a whole range of specialised implementation adapters and toolkits that are continually enhanced and expanded.
Be more agile and tactical
When technology becomes outdated it can easily go from an asset to a liability. While COVID-19 has emphasised this reality for some, truly appreciating it requires a comprehensive assessment of existing technology and its long-term impact on business. Outsourcing through PaaS has a wealth of benefits that can radically transform this situation. Financial institutions can become more agile and tactical so they can continue to innovate and provide services that customers demand while differentiating themselves from the competition.
Teaching Your Kids to Build Good Credit: The One Tool You Never Knew You Needed
Teaching your kids about money can be tricky. You want them to understand the value of a dollar without putting undue pressure or stress on them too early on. It’s essential to have productive conversations with your children around money so they can have the knowledge to guarantee their own financial well being when they become adults. One of the most important conversations to have with your kids is on the importance of building good credit, the steps they can take to do so, as well as techniques for avoiding the risks of poor credit. While you may have already thought to educate them on credit cards and loans, there is one tool you may have never considered that can help you underline this lesson. Read on to find out more.
Tradelines – What Are They?
A tradeline is defined as a record of activity for any type of credit that has been extended from a lender to a borrower and is also reported to a credit reporting agency. In short, a tradeline is a record-keeping mechanism that tracks all of the activity associated with that borrower’s account. For each credit account you have, you will have a tradeline. Generally, tradelines are one of the most widely used tools credit agencies use to calculate an individual’s credit score.
Tradelines typically include the following information:
- The name and address of the lender
- The type of account
- Partial view of the account number
- Current status of the account
- The date the account was opened
- The date the account was closed (if it has been closed)
- The date of last activity
- The current account balance
- The original loan amount or credit limit
- The monthly payment amount
- The recent balance (only applicable for credit cards)
- The payment history
The Type of Tradeline You Never Knew You Needed
When it comes to educating your child on the logistics of building good credit, there is a specific type of tradeline that can help achieve this goal: AU tradelines. In this case, AU stands for authorized user. In this type of tradeline arrangement, a parent can add their children to their tradelines as a means of aiding in building their credit. In other words, AU tradelines are the perfect tool to get your kid’s finances started on the right foot as they enter adulthood. By providing your child with this assistance early on, you will not only boost their credit, but you will teach them a valuable lesson on how to “futureproof” their credit management and use such tools to their benefit.
Ultimately, holding constructive conversations with your kids around responsible financial practices is an essential step in guaranteeing their future prosperity. Not only will you enhance your children’s understanding of valuable financial tools, but you will set them on the path to financial security and freedom. The more freedom and stability they have, the sooner they will be able to achieve their financial goals of buying a car, a home, or paying for their education. At the end of the day, you cannot put a price on that kind of peace of mind.
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