Start-Up Proposes Using Cell Phone Data as Credit Score
The start-up Tala is offering a solution to the nearly 70% of the world that do not have credit scores.
Without a credit score, it’s impossible to secure lines of credit, make large purchases, borrow, rent a home, or even secure high-paying jobs. For many banks and lenders, a credit score represents one’s ability and willingness to repay their debts, making it a more important reputation identifier than a person’s name.
For 69% of the world, there is no access to this essential marker. In 2017, the World Bank estimated that 1.7 billion people worldwide are unbanked or have no access to traditional banking products. While being unbanked is not necessarily economically exclusive, it carries true economic repercussions.
One start-up is seeking to fix this. Addressing the more than two-thirds of the world without access to a traditional credit bureau, Tala is offering loans up to $500 to those without a credit score. Tala is using an alternative algorithm that takes into consideration one’s cell phone payments and usage — over two-thirds of the world have access to a mobile device — and over 250 other data points to determine creditworthiness.
This may prove to be a game-changer in the question of how to best deal with the unbanked question. “Worldwide, half of unbanked adults come from the poorest 40 percent of households within their economy, while the other half live in the richest 60 percent,” the World Bank reports. “This global pattern is replicated in many economies where half or more of adults are unbanked, such as Colombia, Ethiopia, Indonesia, and Nigeria. In these economies, unbanked adults are just as likely to come from poorer households as from wealthier ones.”
“But in economies that have expanded account ownership to two-thirds or more of adults, poor adults are more overrepresented among the unbanked.”
The Problem with Lack of Banking Access
Lack of access to banking products means that individuals may not have access to the seed capital needed to build wealth, stalling or stopping one’s ability to accumulate personal equity. In the United States, for example, aggressive racial banking discrimination in the 20th century prevented African-American families from securing home equity loans at the same rates as non-black households.
The repercussions of this have been grave. As K-12 education funding in the United States is based on community property taxes, lower-valued homes will yield less tax revenue for lower schools. This translates to less pay for teachers, fewer school amenities, and a lower quality of education in these communities. Fewer of these communities’ residents will be prepared for higher-paying jobs, creating a self-enforcing repeating cycle of poverty.
In 2017, for example, black households had a median household income of $40,258, per the US Census Bureau, compared to $68,145 for a white household and $81,331 for an Asian household. According to the Federal Reserve, the 2016 median net worth of a white family in the United States was $171,000. This is compared to $17,600 for a black family.
While Tala has more of a global scope, the company represents the potential of fintech to socially engineer the world’s greatest ills. Tala has raised over $220 million from private investments to offer 20 to 90 days short-term microloans — $500 is the maximum amount that can be financed at one time by trusted repeat borrowers — for borrowers in developing economies, such as the Philippines.
“Emerging markets are traditionally looked at as risky, and thus not holistically served by traditional banks, and that’s the opportunity we’re chasing,” Shivani Siroya, the founder and CEO of Tala, said to CNBC.
While mobile credit scores do not represent a solution that can currently be used to resolve the world’s unbanked crisis, it represents a willingness to think differently about the problem. “The idea of lending purely based on the data available on a consumer’s mobile device was completely unproven — no one had ever done it,” Jeff Richards, a managing partner at GGV Capital — a backer of Tala — said.