Fintech Tracker: Your Phone And Facebook Account Can Help Improve Your Credit Score

Only one out of four people with bank accounts have ever taken a formal loan, according to statistics from ratings agency CRISIL. There are a number of reasons for this but one of them is the fact that many individuals do not have a formal credit score or a credit history that banks can use to assess their credit worthiness.

India currently has four large credit information companies (CICs) including the Credit Information Bureau (India) Ltd or CIBIL, which is the largest and claims to cover 550 million people. Most lenders rely on the scores given by these CICs before they decide on whether they should lend to an individual or not. The agencies, in turn, assess income, cash flow and past credit history to assign a score to a potential borrower.

But what happens if you don’t have a credit score?

Rajiv Raj, co-founder and director of CreditVidya, says the traditional system of credit scoring is both inadequate and broken. An alternative is available in the form of companies like his which offer a credit assessment based on alternate data.

The problem, Raj said, lies in the fact that traditional bureaus only look at transactional data from past loans and advances, something which may not exist for first time borrowers or younger people just entering the workforce.

The way his company plugs this information divide is by sifting through a potential borrower’s digital footprint. This includes a person’s phone, their call history, social media activity and even their web browsers.

“All of us are leaving a lot of footprints every day. You could be moving around giving location history, making calls, using your debit cards to pay bills and all that data can now be used to assess your creditworthiness,” Raj said in a phone conversation with BloombergQuint.

These alternate sources can provide up to 10,000 additional data points for a lender to look at, according to Raj. Once collected, the data is cleaned up and processed through an algorithm which raises red flags based on three core parameters which decide a lending decision. These parameters include a customer’s ability to pay, their intent to pay and stability in their life in general.

How Does It Work?

Take for instance, a customer who makes regular calls to his family and a small group of friends. Such a customer is seen as stable by the algorithms used by CreditVidya. In contrast, someone who has few friends on Facebook and doesn’t talk much is viewed negatively due to a tendency towards isolation. These sort of quasi-indicators generally prove strong enough for banks to make a lending decision, Raj insists.

To be sure, CreditVidya also uses transactional data in its analysis as well which means you can’t entirely get away from traditional ways of assessing credit worthiness.

“If I am not paying my phone bills or internet bills on time, then obviously there’s a red-flag there about the customer’s behaviour towards paying his dues. If my cheques are also bouncing, then it says something about my intent,” Raj said.

Broadly, the company makes use of four sources:

• Device fingerprinting: Data on calls, texts, and contacts gleaned from the mobile phone
• Social fingerprinting: Activity on social media platforms and public conversations
• Browser fingerprinting: Information on websites visited and searches performed by a person
• Biometric authentication: Aadhaar based verification which authenticates a person’s identity

All these four components come together to arrive at a credit risk score which helps lenders rate a customer.

To address data security concerns, the data is accessed only after permission from a customer and is not stored with CreditVidya.

“All data collection is consent based,” said Raj. “There are permissions that apps ask for once installed which we use to get their consent. We have to go in through an app into a device from where we are able to collect customer data ranging from call data to social media behaviour.”

How Reliable Are Alternate Credit Scores?

While the new credit scoring methods are innovative, they are not yet robust enough to be used as a standalone indicator, said Kalpesh Mehta, partner-banking at Deloitte.

Harshala Chandorkar, chief operating officer at TransUnion CIBIL shares that view.

Banks and credit institutions have been using CIBIL scores for “over a decade” and benefits are evident, said Chandorkar in an email exchange with BloombergQuint.

“With banks and credit institutions now offering risk based pricing on loans, the CIBIL score and report becomes even more important for access to credit,” Chandorkar said while acknowledging that alternate data is likely to enrich the credit information database.

“While inclusion of alternate data like telephone and electricity bill payments in the mainstream credit information database will definitely add greater value, a traditional credit score and report is paramount for credit decisions,” she said.

Chandorkar added that CIBIL is in discussions with regulators for the inclusion of telecom and utility payment data in the bureau’s database.

That’s not to say that new and emerging ways of assessing credit worthiness should be dismissed entirely.

“When customers are taking small loans, they may not be able to offer security in terms of tangible assets. So, they could provide their social media access to companies which can then judge, on the strength of their networks, if the person can be trusted or not,” said Mehta.

Is The Model Gaining Traction?

This mode of credit scoring is turning out to be popular with smaller lenders and startups who are trying to build a client base in the retail and small and medium enterprises segment. Banks, however, are treading cautiously.

CreditVidya has so far signed up with 12 lenders, which include non-bank lenders such as Capital First, Aditya Birla Finance, Bajaj Finserv and banks such as IDFC Bank, ICICI Bank and RBL Bank.

It provides these lenders with end-to-end application suites which are supposed to collect, authenticate and analyse the information regarding a person. It generates an output report indicating creditworthiness of the borrower.

While there might be some threat from others startups leveraging a similar set of indicators to lend directly to customers and from companies like Lendo, which also uses non-traditional data to assess creditworthiness of borrowers, Raj expects business to grow rapidly.

“The business has been good. We have witnessed a growth of 400 percent in our topline over the last year and these models are likely to be adopted throughout the industry really soon,” he said. The post-demonetisation emphasis on going cashless is also likely to provide the industry a boost as more digital footprints get generated, he added.

This report is part of a series profiling fintech firms changing the way financial services operates in the India. The series will play out every weekend on Bloombergquint.com