Identity and risk: providing finance in the developing world
In the Arab world, more than 70% of adults and 4 out of 5 businesses would benefit from greater access to financial services, according to The Alliance for Financial Inclusion.
Access to banking varies widely between countries but the importance of the issue in the Middle East is shown by the Arab Monetary Fund’s support for the Financial Inclusion in the Arab Region Initiative.
Globally, there are 1.7 billion adults without some form of bank or payment account with the G20’s Global Partnership for Financial Inclusion demonstrating international political consensus that the problem needs addressing.
The World Bank’s Global Findex report highlights how financial inclusion can help people escape poverty by allowing saving for health, education and business growth as well as the easier transfer of funds to support family members. There are also benefits for governments, with a move from cash to digital payments reducing corruption and improving economic efficiency. Financial inclusion also represents a massive commercial opportunity for both traditional and fintech organisations.
But how can businesses such as insurers and lenders mitigate the risks of operating in such markets? And is identity and behavioural data the key to a worldwide banking revolution?
Microfinance and microinsurance
Financial exclusion is slowly reducing. But while 94% of adults in developed economies have a bank or payment account, that figure drops to 63% in developing countries.
The provision of banking and insurance services to the unbanked – who are often on low incomes – is known as microfinance and microinsurance. The practice has existed in a variety of forms for centuries but the rise in mobile phone ownership and internet access is transforming and expanding the market.
China has the largest unbanked population (225 million adults), followed by India at 190 million. Both countries actually have a relatively high proportion of account ownership but their sheer size means they still represent the largest opportunities for development. Pakistan (100 million) and Indonesia (95 million) come next, and these four countries along with Nigeria, Mexico and Bangladesh are home to almost 50% of the world’s unbanked population.
Mobile phones and microfinance
Two-thirds of unbanked adults own a mobile phone and these are often the key to accessing microfinance.
Mobile banking operates in two principal ways. The simplest form is a text-based mobile money service, controlled by a mobile network operator that allows users to store and transfer funds through their phone with no linked bank account. Smartphones with internet access are not required. These services are used worldwide but are particularly important in Sub-Saharan Africa where the M-Pesa mobile platform has 32 million users.
Alternatively, personal finances can be controlled via smartphone apps linked to an individual’s existing bank account. This approach is very popular in China with operators such as Alipay and WeChat dominating the market.
Paytm illustrates the scale of mobile payment opportunity in India. This mobile phone and digital wallet payment service recently reached an annual gross transaction run rate of USD $29 billion, logging one billion transactions per quarter. The fact that 50% of all Paytm transactions are made outside major cities and in rural areas shows the power of such technology to reach traditionally unbanked populations.
Developing fintech services
Once an individual has access to some form of financial services they may look to borrow money or take out small-scale, affordable microinsurance. This poses a significant challenge for lenders and insurers as these previously unbanked customers are unlikely to have any formal credit history from which to evaluate risk. They may also be too far away from a physical branch where applications would normally be processed.
With such a massive potential market there are many fintech businesses offering solutions that look to reduce this risk and give access to financial services.
Personal data analysis and profiling techniques are one way to verify the identity of customers and evaluate their credit worthiness. Lenddo is a major global player that looks at all aspects of an individual’s digital footprint to assess their application. The data evaluated could include social media activity, networks of contacts, geolocation and browsing history. All this data can be gathered from one-off access to a customer’s mobile phone (for which permission must be given) and a credit judgement can be made immediately.
Lenddo recently joined forces with EFL Global, a credit agency that uses psychometrics and behavioural science to analyse personality and assess risk. Such combinations of digital behavioural and psychometric data is enabling millions of unbanked people to be offered financial services in return for access to personal data.
Richard Eldridge, CEO of Lenddo, is clear that the customer is in control: “We allow customers to choose which data they want to share, if any, to get access to financial services from our clients. The more data someone grants us access to, the better we can understand them, and the better financial institutions can match them with appropriate offerings.”
Kreditech is another fintech business using machine learning and non-traditional data analysis to create credit scores. Its technology looks at up to 20,000 data points per application and the company claims to be able to score a customer in less than one minute and “determine credit risk with higher precision than traditional credit bureau-based systems, especially for thin-file customers.”
Kreditech is focusing on the Indian market, as well as Poland, Spain and Russia, showing that this technology has applications across different global economies.
A further competitor is Trusting Social that analyses the creditworthiness of an individual from their digital identity by measuring authenticity, their depth of networks with other people, plus their likely income based on work history and education.
All these businesses operate by licensing or customising software that is integrated into a bank or insurer’s online application process. (Learn more about personal profiling in insurance and lending in this accompanying article.)
Funding and research from the United Nations Capital Development Fund is also supporting financial inclusion with the provision of digital microfinance throughout the developing world, especially to women (who make up 56% of the world’s unbanked population) and in rural areas.
China insurtech and fintech
The insurance market in China is huge. Zhong An, the country’s first online-only insurer, was valued at USD $11 billion at its IPO in 2017. Zhong An’s business model is to partner with other digital organisations that sell its insurance as low cost micro-policies such as screen or flight delay insurance.
In addition, the three Chinese tech giants of Baidu, Alibaba and Tencent are each teaming up with insurers and leveraging their customer reach and wealth of data to offer fintech insurance products.
For example, search engine giant Baidu has partnered with Allianz and described how its mapping app could provide information on a motorist’s driving behaviours that would allow risk to be assessed and a suitable premium to be offered.
Meanwhile Tencent partnered with traditional insurer Manulife to allow customers to submit medical claims through its WeChat platform, with the technology allowing same-day decisions in most cases.
And how large could the sector grow? Consultants Oliver Wyman judge that total insurtech premiums in China will exceed USD $174 billion by 2020. They also caution that the wider banking sector needs to integrate fintech approaches more thoroughly.
“The state-owned banks have started their strategic planning by partnering with leading technology firms to share technology and resources to lay a solid foundation,” said Cliff Sheng, co-head of Greater China at Oliver Wyman.
“However, a lot of partnerships remain at the departmental level and are yet to be fully incorporated into the wider bank. These are also often focused on product-driven innovations and have not yet made an impact at the strategic level.”
The risk with digital financial products is that customers can create fake identities, use accounts to launder money or conduct forms of cyber fraud.
The question of identity has been addressed in India by the government’s KYC legislation that requires financial institutions to ‘know your customer’. Account ownership must be verified using government-approved documentation, removing the likelihood of money laundering and fraud. The legislation has caused major headaches for Indian fintech businesses but extensive marketing, incentives and customer education initiatives are accelerating rates of compliance.
China is tackling the problem with its social credit system, a government-backed scheme that aims to give each citizen a trustworthiness score by 2020. That score will be based on data from tech giants as well as government information, with individuals measured against a range of good citizenship behaviours.
It will not only affect access to credit and government services but everything from travel visas to cheaper car hire.
The rapid evolution of technology, particularly in machine learning and AI, coupled with the vast quantity of data created by customers’ increasingly digital existences, mean it is becoming harder than ever to cheat the system.
This is particularly true in fintech microinsurance. For example, claims of robbery at knifepoint could be checked against smartwatch biometric monitoring to verify a spike in heart rate. Or whiplash medical claims could be matched to movement and geolocation data on a smartphone.
Crossing the last mile
Microfinance, enabled by fintech, is succeeding in giving access to financial services for the world’s unbanked population.
The scale of the task is massive – but with governments, NGOs and businesses all moving in a similar direction, progress will only accelerate. The final mile that separates the world’s poorest people from access to banking is being crossed with increasing speed.