Resolving the Global Financial Identity Crisis

July 11, 2014

Camilla Nestor, Grameen Foundation’s Senior Vice President for Global Solutions, teaches a financial inclusion course at Columbia University’s School of International and Public Affairs. As part of her course, students submitted blog posts that were evaluated by professors and Grameen Foundation’s communications staff. The second of the two winning posts is featured here.

Matt Hennessy

When many of us think about our public and privately available consumer data, we imagine it as an unwieldy monster, one that we would certainly prefer to keep caged up.  We worry that Google and Facebook, who have come to price our worth in increasingly higher valuations, are spraying our information into the Internet ether, to be poached, hacked, intruded upon or leveraged for staggering quarterly revenue.  Yet data also exists as a part of our financial identity.  With nearly 2.5 billion of us without access to any form of formalized financial access, more than a third of the global population has scarcely a trace of financial identity.  The myriad informal mechanisms individuals utilize to save and borrow leave no verifiable payment history upon which financial institutions can rely.  And if we know one thing about financial institutions, it is that they purport to understand and quantify risk based on this very financial history.  So it is, in no small part, perceived individual riskiness contributing to the barren credit environment in which many people operate on a daily basis.  

But innovations are underway to shift the formalized risk-modeling paradigm to include various forms of payment history, to leverage the wealth of mobile and Internet data to create new financial profiles.  Companies like DemystData and Tiaxa have developed unique platforms connecting social network data and mobile phone payment history to create credit identities.  Another institution, First Access, which develops financial profiles based on prepaid mobile behavior for the financially underserved, recently signed a deal with Tanzania’s largest mobile network operator to provide instant risk scores for microfinance and other personalized loans.  

Governments are getting in on the fun too, helping customers use new means to construct their credit profile.  The United States congress introduced the Credit Access and Inclusion Act to build financial credit history without requiring enrollment in credit cards and other high-risk debt instruments.   Permitting utilities and telecom companies to report data capturing customers’ non-financial payment history will dually increase access and reduce cost to creating a financial identity.  In a move of much larger scale, the Government of India launched the unique identification system (UIDAI), which has to date captured biometric data of nearly 600 million citizens since its launch in 2009.  Agent distribution networks are now able to, for example, employ mobile point-of-sale terminals to capture customer data, track payment history and collect savings and remittances at a lower cost to the customer.  A lower entry cost for the customer can lead to greater financial access in more remote areas of the world. 

While governments and private institutions are certainly fundamental to catalyzing growth in credit profiles, as this McKinsey report suggests, financial institutions themselves can innovate their models to incorporate oft-overlooked customer data.  Integrating basic checking and savings account activity can help institutions provide more appropriate loan tenors and sizes to those knocking on the door of increased financial access.   In other words, we are not looking for a radical overhaul of risk management, but a small shift in modeling inputs to allow for greater and more transparent assessment of risk.   

To be sure, institutions and regulators will need to remain vigilant in their protection of clients, ensuring the privacy of personal data.  Initiatives like Accion International’s Smart Campaign stress the importance of transparency and customer protection while fostering an enabling environment for growth in the microfinance sector (Accion’s Chairman Diana Taylor and CEO Michael Schlein recently wrote this opinion on Forbes).  With so many new entrants into formal financial products and services, education of the risks data pose will certainly need to be commensurate with its productive offering.  

With the emergence of impressively profitable and scalable software technology companies, we know above all, that data is increasingly valuable.  With ever-growing mobile and Internet penetration across the world, there exists a tremendous opportunity to elevate the value of those individuals who possess marketable transaction history but lack a means to mobilize that data for their various financial services demands.  With market innovators transforming data into credit insights, start-up and corporate entrepreneurs alike can wield data to provide financial identities in the world’s most remote areas.  With, for example, 70% of Sub-Saharan African population living in rural, agriculture-dependent economies, creative credit scoring tools posses a huge potential to increase access to finance.  Across the agricultural value chain, from micro-credit payments to seed collection history to storage facility usage and product yields, a sea of consumer data can better assess the level of consumer risk profiles for the world’s financially underserved.  

And so we see that the most exciting aspect of consumer data is not its ability to create $3 billion ephemeral photo-sharing apps, but long-lasting in-roads for financial access and growth.  With public sector policy support and private innovation, resolving the global financial identity crisis will be play a pivotal role in reducing barriers to global financial inclusion.