IN the “Marvel Cinematic Universe,” one is deemed “worthy” if they can lift Thor’s hammer, just like what (spoiler alert!) Captain America did in the movie “Avengers Endgame.” In consumer lending, one of the most common ways to determine whether an individual is “worthy” of a loan is through credit scoring, a statistical analysis performed by lenders and financial institutions to determine the creditworthiness of an individual or sole proprietor, according to Investopedia.com.
Credit scoring is for a person as credit rating is for a corporation or government. Credit scoring aids in the decision-making of lenders to either extend or deny an individual’s loan application. In the Philippines, while most local banks and lending institutions have their own credit scoring systems, many have developed their models not based on statistical analysis of probabilities of default but on their respective experiences, relying on the applicant’s bank transaction or credit history, supplemented with available credit bureau information to assess the applicant’s ability to pay the loan.
To develop a robust credit scoring system, a vast amount of data, such as financial and non-financial information, as well as default information of borrowers, is crucial. This is where the use of alternative data, defined by the World Bank Group as information harnessed from modern data sources, comes in.
In a webinar hosted by the Fintech Alliance Philippines and TransUnion Information Solutions Inc. in January 2022, the Bangko Sentral ng Pilipinas (BSP), through then BSP governor and now Secretary of Finance Benjamin E. Diokno, asked financial firms to look into clients’ non-traditional or alternative data, such as social media or online transactions, for credit scoring.
“With alternative data, a more complete picture of the client is painted; thus allowing for more individuals and businesses to be assessed,” Diokno was quoted as saying. The use of alternative data also allows banks and credit institutions to evaluate loan applications of individuals and firms who have little to no credit history, helping to expand financial inclusion in the Philippines.
Ellen Joyce L. Suficiencia, director of the BSP Center for Learning and Inclusion Advocacy, added that data from the Credit Information Corp. showed less than 50 percent of the adult population has a credit record.
Experiences from developed countries show that alternative data in credit scoring allows for a broader profile view of borrowers, augmenting already existing mature data sources such as government credit registries, credit bureaus and other participating government and private institutions. Using alternative data in credit scoring is also available locally. Companies like FinScore help financial firms improve their customer profiling, adjust the pricing of loan products and even cut their default rates using data from telco and social media behaviors Compared to traditional information sources such as personal income sources or employment history, alternative data are objective, unbiased and immutable, making them an excellent input to statistical analysis.
“The use of alternative data for credit scoring is just one example of how data can be used to benefit consumers. Looking ahead, we must continue to take initiative in fostering an inclusive digital financial ecosystem,” Diokno said. With alternative data-based consumer credit scoring, one need not be the “God of Thunder” to be deemed “worthy,” at least in our universe.
James Patrick Q. Bonus is the deputy country manager and chief finance officer of Finscore Inc., a fintech firm providing alternative data-based consumer credit scoring and identity verification solutions for financial institutions. Bonus is also a regular subject matter resource speaker for the Bankers Institute of the Philippines and other organizations through Acepoint.ph Training Consultancy Services.