The biggest and most important war of fintech is the war with financial illiteracy. Bill Gates (Microsoft), Mark Zuckerberg (Facebook), Pierre Omidyar (eBay) began to support it actively in 2016. Let’s discuss now, how this problem was approached by financial services price comparison sites, financial planning, and finance-related big data and online scoring platforms.
The services focused on work with centralized credit bureaus in developed countries, such as the American leader CreditKarma (service boasts 50 million users, who assess their credit histories and manage over $3 trillion in debt, and has a $3.5 billion capitalization) or newcomers, like British ClearScore (attracted 2 million users in a year), are developing in a more predictable and stable way. However, this model restricts their potential and scaling capabilities as well.
Projects targeting specific needs of certain customer groups (and their behavior data) draw much attention too. SelfScore analyses credit histories of foreign students in the USA and derives credit scores (compare it to the British mobile bank Monese that targets expats). NovaCredit, meanwhile, works with immigrants in the USA, focusing on those from India and Mexico. There is an advantage in this focused approach – you can clearly see what information is relevant to your analysis when you narrow the scope of the query. In addition, targeted solutions appeal more to the clients.
In the new issue of “Money Of The Future” annual fintech report we can found that the services, which work in developing countries with users with absent or insufficient credit history, operate in a riskier segment, but their growth potential is unlimited. This is quite natural as credit potential is probably more significant than credit history. American ZestFinance is the most striking example. It has attracted the Chinese search engine Baidu as a shareholder (80% of search queries in China) and expanded with its support to China to analyze the credit rating based on search queries, geolocations and payment transactions of customers.
Besides China, where the market significantly depends on government decisions and actions of the BAT companies (Baidu, Alibaba, Tencent), Indian market looks very promising for newcomers as it’s rather big but more fragmented and of less density. This year the Southeast Asian markets will probably wake up to new trends, with Indonesia being the largest market in the region.
Partnership between Baidu and ZestFinance and Sesame Credit by AliPay are just two of several private pilot programs in China’s push to develop a nationwide social credit system. The current implementations are currently unconnected, but may ultimately be combined under government leadership. Part financial credibility indicator and part compliance mechanism, the social credit system aims to generate a score for individuals and institutions in China based on data like tax filings and driving demerits. And while consumers may reap rewards, the score also functions as a signal mechanism for authorities about whom or what deserves to be penalized.
A substantial proportion of China’s population remains unbanked and parts of the economy are largely cash-based, and Chinese government is very active with their plans to push its own fintech and AI industries. The ambition is to collect every scrap of information available online about China’s companies and citizens in a single place – and then assign each of them a score based on their political, commercial, social and legal “credit.” Beyond Sesame Credit’s reward offerings, public social credit systems offer good-behavior benefits that can be minor conveniences like enhanced borrowing privileges at a local library, or free loaner umbrellas. But rewards can also have greater financial significance like expediting loan application approvals.
Ayannah, the leading provider of affordable and accessible digital financial services in Philippines has partnered with Bayad Center, the bills payment subsidiary of Meralco, the Philippines’ largest electric utility to launch Juan Credit, the first artificial intelligence-powered credit scoring system for the unbanked in emerging markets. JuanCredit will analyze unstructured data from various sources – bills payment, mobile tops, insurance premium payments, social media profiles – to provide meaningful credit scores for unbanked Filipinos and provide banks, financing companies, insurers and property developers with a system that will instantaneously and continuously update a borrower’s credit worthiness and insure sound underwriting.
Tallinn-based customer analytics startup DataDepot has tapped its first big clients in the United Kingdom and is now expanding its business in Asia. It is also seeing increasing demand for its fintech matching offer in Asia where some of them have cheap & fast customer acquisition, but low margin and from another side high margin, but expensive customer acquisition. It’s “Tinder for” fintech startups. They are actually matching fintech startups with their peers and they can both benefit from the relationship. The platform for fintechs and insurtechs connects startups to leverage customer bases, co-operate and not compete (no operational costs for creating additional service or product), know more about their existing customers and attract similar ones using internal marketplace.
Banks in Asia are using customers’ smartphone data points, like how often they drain their battery, to determine whether or not they’re eligible for a loan. While this may sound like an unusual criteria for qualification, Singapore-based startup Lenddo thinks it can help people without traditional credit history borrow money. But its program is primarily used by lenders in emerging markets, such as Asia, Africa and Latin America. Most people in those regions don’t have traditional bank accounts or credit cards but access to a smartphone is increasingly greater.
The company is already helping dozens of banks analyze data from millions of smartphones globally. The 5-year-old firm’s software platform analyzes thousands of data points – everything from a smartphone user’s messaging and browsing activity, to the apps and Wi-Fi network they use. Factors like the cellular towers a phone pings are examined, too. Lenddo puts the data points into a complex proprietary algorithm, which computes how likely someone will default on a loan. Lenders then decide the default rate they want to accept. Banks either buy a license to use Lenddo’s software, which is pulled into an existing bank app, or Lenndo can build a separate app for the bank. It takes less than three minutes to calculate a rate through Lenddo. Lenddo’s goal is to help 1 billion people get access to financial services by 2020.
FICO, a global credit rating agency, announced that it will start letting nonfinancial information help determine scores. FICO has partnered with Lenddo to develop a credit risk score for consumers in India and to help facilitate loans for small businesses and individuals in India and Russia. It will give lenders improved certainty around the risk assessment of people with ‘thin-files’ – those who don’t have enough data in their credit report to score. With Lenddo’s technology, FICO can check if users’ phones were physically present at their stated home or work address, and if they are in touch with other good borrowers – or with people with long histories of fooling lenders.
Financial institutions, overcoming some initial trepidation about privacy, are increasingly gauging consumers’ creditworthiness by using phone-company data on mobile calling patterns and locations. The practice is tantalizing for lenders because it could help them reach some of the 2 billion people who don’t have bank accounts. Selling such data could become a more than $1 billion-a-year business only for U.S. phone companies over the next decade, according to Crone Consulting LLC.
Also Lenddo will give its own score for these borrowers which will give an additional yardstick for MFIs to assess them. The new service will cover individual MFI customers who live in urban areas and have an android phone. MFIs over the last six to 12 months have begun using tablet-based solutions while travelling to remote locations and capturing know your customer (KYC) details of customers and avoid complicated paperwork. These new solutions have reduced the turnaround time required by these lenders, which has also helped in cutting operating costs.
Observing actions of big centralized credit bureaus – Experian (partnered with JD Finance to fight online fraud) and Equifax (launching a pilot program with P2B-lending platform InvestDen) – they obviously realize that the market is changing (especially in Asia), as traditional approaches do not allow these giants to tackle their new clients’ problems in an efficient way. How much should these “dinosaurs” change? This fundamental question is addressed in many books and articles such as “The Innovator’s Dilemma”.
Right now price comparison sites are very popular in Asia. They become quite useful for unbanked customers when a market is mature enough, yet still growing – people need some sort of a guide when they make their choice. This is the advantage of such services (in the stage of market formation, such aggregators accumulate more audience than all service providers in total), as well as their weak spot: when the market is saturated and a client chooses a satisfactory service provider, the motivation for using such services slumps.
Such services also develop rapidly in Asia (due to high growth rates and active market). A Hong Kong holding company CompareAsiaGroup (with a presence in Hong Kong, Indonesia, Malaysia, the Philippines, Singapore, Taiwan, Thailand and Vietnam) has attracted $40 million in Series A round ($45 million in total) from Goldman Sachs and other investors. Indian BankBazaar (cooperates with 50 banks and has the audience of 5,5 million visitors a month) has raised a $60 million round C from Amazon (India is an important market for them) and other investors for expansion to Singapore, Malaysia, Philippines, and UAE. Many new companies spring up in Malaysia – LoanStreet, SavingPlus\Jirnexu (present also in Indonesia) and iMoney. Meanwhile, a sector of real estate and mortgage aggregators is booming in Great Britain (like Habito and Trussle).
The only way for aggregators of banking and insurance services to counter this unwanted tendency is to play with forecasts: to migrate in new segments and come up with new services for their customers. Neobanks, personal financial management and planning (PFM/PFP), and online scoring (based on big data assessment) solutions, p2p-lending platforms are the most obvious choices. These players accumulate at some point a large number of customers and a large amount of their data, but if they don’t evolve, they eventually fail after about three years of growth in average.
Regarding PFM, yet another “exit” took place in the segment in 2016 – American Prosper, one of the leading p2p lenders, acquired Billguard for $30 million (now called Prosper Daily). One year earlier, other American companies in this segment were acquired: Yodlee was bought for $590 million by the wealth management technology provider Envestnet, LearnVest – for $250 million by the insurance giant Northwestern Mutual, while Social Money (SmartyPig) was acquired for $10,6 million by the student lender Sallie Mae. In 2014 British payment processor Misys bought Hungarian developer of PFM solutions IND Group. While Mint, after 3 years of development, was bought for $170 million by Intuit in 2009.
You can barely compare any PFM solution with Mint in terms of the customer base, as the company has over 20 million clients – even Brazilian GuiaBoslo and American Billguard with 2 and 1,3 million clients accordingly pale in comparison. As for other independent players, their client base is measured in hundreds of thousands of clients. A new wave of interest in PFM solutions enabled many companies to attract new rounds: only Digit, GuiaBolso, MoneyForward, Tink, Meniga, Trim, TrueBill, Penny and Plum raised $74,6 million together in 2016. The majority of PFM services are purely American. Some services (this is more typical of Non-American projects) grow by integrations and partnerships with banks. Deposit products (micro savings) are actively promoted as a mandatory element of financial literacy and an effective tool of financial management by such services as Digit, Qapital, Plum, E-susu. The rapid grow of AI technologies and chat bots has influenced the development of such startups as Kasisto, Digit, Qapital, Penny, Trim, Plum and Cleo.
In comparison with price-comparison sites, it is noteworthy that PFM rarely works as a stand-alone solution, but it effectively complements many other services like mobile banks (Moven’s partnership with MoneyDesktop, move of Singaporean Kashmi into PFM market and full-scale mobile banking, American Trim and Swedish Tink eager to develop their virtual banking solutions), p2p- (acquisition of Billguard by Prosper) and student lending (NextGenVest, acquisition of SmartyPig by Sallie Mae), insurance (NorthWestern Mutual deal with LearnVest) and wealth management (Envestnet’s acquisition of Yodlee) solutions. And big data is a connector between all verticals: online scoring will do to the financial system what the Internet did to media.
This post is part of our contributor series. It is written and published independently of TNW.