credit scoring on a mobile phone
credit scoring on a mobile phone

What are the Advantages of Alternative Credit Scoring?

In the Philippines, banks, lending companies, and other financial institutions often have limited appetite to approve loans to the credit-invisible. This is mainly because credit scoring in the Philippines still often relies on traditional methods, which results in a lack of customer data or history to assess creditworthiness.

In this article, we tackle the major advantages of alternative credit scores and how they benefit both lenders and borrowers.

Alternative Credit Scoring Advantages

According to FinScore’s Chief Strategy Officer and Country Manager Christo Georgiev, there is a gap or gray area between credit providers and credit-invisible segments. He mentioned this piece of information at the Ultimate Fintech Forum 2021.

The lack of data has been an obstacle for banks and financial institutions to extend credit to the unbanked and underbanked population. With limited options, these people often turn to informal channels despite high interest rate.

FinScore is trying to bridge this gap by utilizing telco data to provide credit scores to the credit-invisible, including first-time borrowers. Telco data is very useful in predicting the risk level of an individual without a credit history. FinScore Telco Data Credit Score is built on over 400 various telco variables such as top-up patterns, voice and mobile data usage, duration of calls, SIM card age, and many more.

While the process benefits individuals who want to apply for a loan, alternative credit scoring also provides these advantages to banks and financial institutions:

man using his phone and telco service

Assess Borrowers Beyond Traditional Data

By integrating credit scoring models based on alternative data, such as telco data credit scoring, banks and financial institutions can make faster and smarter credit decisions. For instance, Telco Data Credit Scoring can help credit investigators to take further steps without taking more time and exerting more effort, especially when using the right tools.

Here are examples of telco data variables and what behavior insights it can tell:

  1. Geo-location data – a telco-data based geo-location tool can verify declared work and residential address on a city level. When used as a fraud detection tool, it can be an extremely powerful fraud indicator that can check the truthfulness of the loan applicant. It can also help with the collection efforts once the loan is granted.
  2. Time since activation of SIM card – Also known as SIM age, this variable can help determine the person’s loyalty to the telecommunication provider. Individuals that engage in fraudulent activities tend to change SIM cards from time to time. On the other hand, individual who intend to maintain their SIM cards may show that they value their social circle and their contacts.
  3. Top-up patterns – For subscribers that use prepaid SIM, they would need to purchase load credits based on their SMS, call, and data usage. The variable measures the airtime amount (in PHP) the customer recharged into his airtime wallet in the past 3 months Such patterns can determine the person’s capacity to pay.
  4. Load sharing – In the Philippines, subscribers can share their load credits to their peers who might need it. This variable can help to determine the spending patterns of the person.
  5. Top 10 contacts – In traditional credit assessments, credit investigators request for co-guarantors that can vouch for the primary borrower. There are times that borrowers randomly provide mobile numbers in this stage. By comparing the top 10 frequently contacted numbers from the declared mobile numbers, the credit investigator can easily know if the borrower is trustworthy or not.

Reach Untapped Markets Including the Unbanked

Given the absence of credit scores, a huge portion of unbanked Filipinos cannot apply for loans. Even if they do, they have little to no chance of getting their application approved because they lack traditional data.

According to the Bangko Sentral ng Pilipinas, 71% of the adult Filipinos remain unbanked. That’s a total of over 51.2 million people who have no access to loans and other credit solutions. As they don’t have a credit history, it’s difficult for banks and financial institutions to approve their loans. But, alternative or digital credit scoring is the bridge that boosts the loan appetite of lenders, since they will be using alternative data that provides unique insights. Alternative data credit scores can be combined with traditional data that can reveal an enriched financial reputation of the unbanked and underbanked.

an agreement to refinance a loan based on credit scoring

Better deals for existing borrowers

This is one of the advantages of credit scoring that benefit both borrowers and financial institutions. Existing borrowers who got their loans approved based on their credit history or limited credit data will have access to lower interest rates. They may have gotten high interest rates because their scores barely made the cut-offs used by most lenders.

With alternative credit scoring, they may receive more favorable pricing as they will be assessed using real-time data based on their eCommerce purchases, telco usage, bill payments, and other financial transactions. As existing borrowers have the chance to refinance their loans, this also puts financial institutions who use alternative scoring in a positive light. Since they provide more accessible services compared to traditional lending companies, they will attract more customers, specifically a huge chunk of credit invisibles and the underbanked.

Enhanced Customer Experience

Last but definitely not the least in our list of alternative credit scoring advantages — taking your customer service to the next level. With alternative credit scoring, machine learning algorithms can rapidly analyze massive amounts of data, significantly reducing the processing time. This can help lenders minimize the costs of loan origination and transfer this benefit into lower interest rates.

Additionally, alternative credit data presents more insights into a consumer’s creditworthiness, improving the accuracy and fairness of credit scoring. This enhances the customer experience by helping credit-invisible applicants qualify for loans and making it much easier to reduce lending risk.

Leverage the Advantages of Alternative Credit Scoring with FinScore

Banks and financial institutions in the Philippines are being more confident in relying on alternative ways to extend credit to the unbanked Filipinos. Adapting to disruptive technologies like alternative data credit score, can help improve lives of individuals and bolster growth for aspiring MSME’s.

FinScore’s mission is to provide credit scoring for all.  We unleash the power of alternative data with cutting-edge AI and machine learning technology, producing more than 5 millions credit scores to partner institutions, and conducted over 40 successful proofs-of-concept (POC). Be part of the change today!

For more information and inquiries about the advantages of alternative credit scores, don’t hesitate to contact us today.

FinScore is a financial technology company in the Philippines that offers a powerful credit scoring platform and fraud detection tools based on alternative data, including telco-based data. 

As the pioneer in lending and scoring of the unbanked, we continuously provide fintech services that empower financial institutions, banks, and credit bureaus with flexible platforms to help them make insightful and reliable credit decisions. Contact us today to learn more about our products and solutions for financial institutions.