By Shabnam Wazed, Founder CEO of AGAM International
Credit is the lifeline of every economy and is a key component for every individual’s financial progression through life. Technology continues to change our lives apace, and credit is just at the beginning of its revolution. While historically credit was assessed on our spending history, innovations in technology are enabling credit to be reengineered and assessed to fit the digital world where our behaviour can provide a more realistic picture of our future behaviour than our past history.
The last real innovation in credit scoring came late in the 1980’s with the development of the Fair Isaac Corporation Score which became the benchmark for American Borrowers and helped set the foundation for credit analysis globally. The components of this credit scoring system are a combination of four elements – credit history, credit composition (types of loans that you may have such as mortgages, shop accounts, cards etc), repayment history, and new applications. The focus has been using past credit to ascertain an individual’s future behaviour.
But what if there is no past credit or past data? Or, what if an individual’s credit history includes hiccups that were out of their control such as the many extraneous factors during the pandemic?
Enter stage left, fintech solutions. They’re about to revolutionise the credit scoring and loan system. Born digitally native, these organisations have a competitive advantage in the credit space over legacy actors such as banks and credit bureaus. Now we are seeing data being instantly analysed rather than continuing to put our faith in historic collateral. With new tech-enabled approaches, anyone can receive a credit score from which to build a credit history. Fintech’s ability to make the data footprint we each create, for our own benefit, is going to change banking forever.
This is where one size does not fit all. Contextualising the creditworthiness of a borrower is critical and learning about their lives is fundamental to forecasting their behaviour patterns.
My company AGAM International, a UK fintech with operations in Bangladesh, has developed the Individual Independence Index (III) which applies a LARC Algorithm to derive a credit score. A customer’s LARC (Literacy, Access, Resilience and Confidence) score uses psychological assessments in the form of quizzes, which seek to measure character, while also including education modules as this plays a key role in making the customer credit literate and leads to credit behaviour. This in turn is used as the basis for their first loan. Over time, transaction history can then support the validation of character. If such scoring can be proved to be accurate then credit access could grow exponentially by addressing the first rung of the ladder: the crucial first loan. That is why we have partnered with Prime Bank, Bangladesh, to pilot digital Nano Lending called PrimeAgrim; enabling people to get a loan in less than five minutes.
This ability to obtain the crucial first loan, via fair means, forms a significant opportunity in the developing world where many remain outside the formal banking system.
Making this data accessible to both credit providers and consumers can provide a transparent partnership to grow credit practically and ethically. Banks now have the opportunity to benefit from diversification into a new asset class created by first time borrowers. In fact, banks who invest in this asset class are likely to be rewarded by loyal customers who will grow their custom year on year.
Digitalisation is driving an overhaul in the way we assess and deliver credit solutions, the likes of which have never been seen before. In turn, the fintechs behind these systems will drive innovation in banking channels, products, and models. Those who see this as an opportunity rather than a threat will attract the next generation of customers.
And Bangladesh is one country which is ripe for this revolution, with a population of nearly 170 million – more than twice the size of the UK – an average age of 28, and with smartphone penetration of more than 40%. These factors combined with a vibrant banking sector, mean this is fertile ground for technology to make this difference, for both the financial services sector and for citizens. Both have the opportunity to get credit, where credit is due. 689 words