Banking the Unbanked in Startup age

The idea of innovation in the Financial Services Industry, especially banking, works differently. Innovation is limited compared to other sectors due to varying banking, security, and insurance regulations as well as licenses and memberships. The most notable innovations in the last three decades include the introduction of ATM’s, online banking, and mobile banking. Despite having a considerable amount of access to resources, both financially and technologically, the traditional financial service industry struggles to innovate and create rapid change. Most of the innovation is product-centric rather than process-centric. This is where startups come in, making an impactful difference by enabling the re-thinking of banking.

Credit Score
One of the core competencies of banks is to issue liquidity. If you happen to be a baby boomer or are a memeber of Generation X/Y and apply for a credit from a bank the processing time of your credit application will be around 30 days including a lot of paperwork and credit risk calculation behind the scenes. The whole process of getting a credit sounds very complicated, even for Western standards. In developing countries, however, it is even worse as a large section of people have no access to financial services at all. Douglas Pearce who is the Practice Manager for Financial Infrastructure & Access, Finance & Markets from World Bank says that 2 billion adults still have no access to transaction accounts. This is partly due to the norms and regulations that are in place for the financial institutions operating in developing countries. The emergence of technology combined with economic reforms that are being introduced in these countries is meant to empower ordinary citizens in these countries. But unless they have access to financial services these reforms are of no use. This leaves us with an unanswered question: How can we make financial services accessible for people living in these countries?

Credit rating is critical factor in calculating the risk involved in lending credit to an individual or a startup. Traditionally, Credit Bureaus are employed for decision making to grant credit which takes many days for processing. But this is going to be history soon. FinTech startups such as creditkarma or Kreditech are already making difference by implementing cutting-edge technology to bolster the financial institutions and credit seekers to calculate their credit score and help them get loans instantly by reducing them to seconds instead of days. This involves using the combination of big data, machine learning, and pattern recognition algorithms to compile data score points for individuals and startups.

Information Used To Calculate The Score Card
A large variety of data is available from social media these days. Information, such as Google search terms or the IP address of the device used, can predict the customer’s credit payment behavior. Thus the information obtained provides actionable insights that are used to calculate credit score complementing underwriting processes. Startups in the lending sector have partnered with payment service providers, e-commerce/m-commerce, banks and Telco’s as well as classifieds, physical agents, and touch points for the underwriting process.

Some of the factors that are useful for calculating credit scores are

Timing: A person calling people at 2 AM has less credit rating than someone calling for credit during day hours.
Typing pattern: Similarly, the typing patterns on the screen can be used to predict the credit score.
Terms & Conditions: The time an applicant has taken hovering terms & conditions could also be used to calculate the credit score.
Message frquency: How frequently applicants send text messages etc.
Payment behavior: Checking a user’s track record of paying bills on time.
The following are the startups disrupting the financial services industry with their unique business models in credit underwriting processes.

Destacame is based in France, creditkudos and aire are based in the UK, while Kreditech is headquartered in Hamburg, Germany. All these startups are leveraging big data, AI algorithms and automated workflows to acquire and underwrite customers. They are challenging the banking world with the degree of excellence of digital process advantage in lending, simultaneously complying with respective country’s regulations.

The credit underwriting startups positioned in the lending sector are focusing on the consumer and startups which have been completely ignored by traditional banks. They are also adding value to the consumer by saving them from payday lenders in countries like the UK who leave the borrower bankrupt with unfair interest rates and aggressive collection practices. Thanks to credit underwriting startups, which are doing a good job by connecting the financial institutions with borrowers and have simplified the lending process through the use of technology, disrupting the financial services industry is ultimately leading to the financial inclusion of many unbanked customers worldwide.