– Financial institutions, overcoming some initial trepidation about privacy, are increasingly gauging consumers' creditworthiness by using phone-company data on mobile calling patterns and locations.
– The practice is tantalizing for lenders because it could help them reach some of the 2 billion people who don't have bank accounts. On the other hand, some of the phone data could open up the risk of being used to discriminate against potential borrowers.
– Phone carriers and banks have gained confidence in using mobile data for lending after seeing startups show preliminary success with the method in the past few years. Selling such data could become a more than $1 billion-a-year business for US phone companies over the next decade, according to Crone Consulting LLC.
– The new credit-assessment methods could allow more people in areas without bank branches to open accounts online. They could also make credit cards and loans more accessible and prevalent in some parts of the world. In the past, lenders mainly relied on bank information, such as savings and past loan repayments, to judge whether to let someone borrow.
– Some of the data financial institutions are using come directly from interactions with potential borrowers, while other information is collected in the background. FICO's partner EFL sends psychological questionnaires of about 60 questions to potential borrowers' mobile phones. With Lenddo's technology, FICO can check if users' phones were physically present at their stated home or work address, and if they are in touch with other good borrowers — or with people with long histories of fooling lenders.
– In most cases, consumers must grant permission for their telecommunications records to be accessed as part of their risk assessment. One reason it's taken the credit-risk industry some time to work out agreements with phone carriers or their representatives is because of negotiations over how to best protect client privacy.
– Companies are also concerned about making sure they don't make themselves susceptible to claims of bias. By checking phone records to see if a credit applicant associates with people with a poor track record of repaying loans, for example, lenders risk practicing discrimination on people living in disadvantaged neighbourhoods. In addition, to comply with the Fair Credit Reporting Act in the US, a data provider must have a process in place for investigating and resolving consumer disputes in a timely manner — something that telecommunications carriers abroad may not offer.
– Startup Cignifi, which helps customers like Equifax crunch data on who phone users are calling and how often, works with phone companies like Bharti Airtel's unit in Ghana. Cignifi scores some 100 million consumers in 10 countries each month, said Chief Executive Officer Jonathan Hakim. Banks typically use such assessments alongside other evaluations to decide whether to grant a loan. Airtel didn't respond to requests for comment.
– "The way you use the phone is a proxy for the way you live," Hakim said. "We are capturing a mirror of the customer's life." His company collects phone data — such as whom the potential borrower is calling and how frequently — from partners like Airtel Ghana, and crunches it for customers like Equifax, as well as marketers. It scores some 100 million consumers in 10 countries each month, Hakim said. Banks typically use such assessments alongside other evaluations to decide whether to grant a loan. Cignifi always gets customers' permission to use data, he said.
– Startups like Lenddo, Branch and Tala have collected several years' worth of data to prove that their methods of using mobile-phone data work — and that customers flock to them for help. Started in 2011, Lenddo, for instance, spent 3 1/2 years giving out tens of thousands of loans, in the amount of $100 to $2,000, in the Philippines, Colombia and Mexico to prove out its algorithms. Its average default rate was in the single digits, CEO Richard Eldridge said in an interview.