Approximately 47% of adults in the Philippines remain unbanked or underbanked, which negatively affects their ability to secure financing – from property loans to personal loans. While there has been a dramatic increase in banked individuals since the start of 2020, a lot of adults are still unable to get approved for loans due to the lack of an accurate credit score. Fortunately, alternative credit scoring is now being adopted by Philippine consumer lending companies and financial institutions to better screen individuals and get a broader perspective of their financial background and stability.
In this article, we will discuss what alternative credit scoring is and what it can bring to the consumer lending industry.
What Is Consumer Lending and How Can It Benefit From Alternative Credit Scoring?
Consumer lending refers to the financial industry that aims to provide individuals with lending or loan opportunities for personal or infrastructure purposes. Various financial institutions offer consumer lending services, including banks, lending companies, and loan agencies. Consumer lending takes on many forms, from consumer loans and gadget loans to student loans and credit.
Unfortunately, most of these institutions depend on traditional credit scoring, which entails giving consumers a credit score based only on their credit and payment history.
While this credit scoring has been used for decades in risk assessment, it’s become a lacking process, especially since not a lot of individuals applying for loans are banked or have adequate or sufficient credit history. Because of this, a lot of loan applications and credit card requests are downright denied. To lower the number of refused loans and improve their ability to assess individuals by using other measurable factors, financial institutions today are starting to incorporate alternative credit scoring in the Philippines to include the unbanked and the underbanked in their roster of potential customers.
With alternative credit scoring, financial institutions and consumer lending companies can effectively and efficiently score individuals using telco information, which include telecommunication patterns, mobile usage, and geo-location.
Benefits of Alternative Credit Scoring for Consumer Lending Companies
To provide consumer lending and financing companies better arsenals to determine their potential customer’s credibility and overall ability to repay loans, alternative credit scoring makes use of strategic and reliable factors. Here are some of the benefits that consumer lending companies can get with alternative credit scoring in the Philippines and around the world:
Lower Chances of Defaults and Lending Risk
Alternative credit scoring services provide financial institutions and consumer lending companies with information about their potential customer’s spending habits, telecommunication activities, and overall financial background without getting into bank transactions and statements. By using alternative information, consumer lending companies will minimize their risk of loan defaults. This is especially useful if financial institutions aim to tap into the unserved portion of the population due to “thin” credit histories.
Fast Processes for Credit Scoring
Cutting-edge artificial intelligence and machine learning technology are typically utilized by alternative credit scoring companies to efficiently process important customer data and predict their credit scores within a short period of time. With machine learning technology, consumer lending institutions can lower their risk of committing any human error in their loan vetting process.
Better Customer Experience
With high-tech processes and procedures employed in alternative credit scoring, customers can enjoy fast and efficient applications, with results being released within a few days. The automated algorithms and technology can pore over massive amounts of data that will efficiently measure a customer’s creditworthiness.
Improved Loan Offers for the Underbanked
In the Philippines today, a significant portion of the population remains unbanked due to limited financial literacy, lacking information, and absence of bank accessibility. With the majority of financial institutions depending on traditional credit information to screen loan applications, unbanked and underbanked individuals are unable to apply successfully for consumer loans in the Philippines. With alternative credit scoring, lending and financing companies can serve the unbanked population by assessing their credibility and borrowing risk through measurable and concrete data.
Better Assessment If Used in Conjunction With Traditional Credit Scoring
With decades of banks using traditional credit scoring, it will be a hurdle to successfully transition to alternative scoring. However, it’s not a question of which one is better. When used in conjunction with each other, financial institutions can offer a safer and more secure process in credit risk assessment. The more data that is assessed during a vetting process for a loan application, the clearer the financial picture of the potential customer would be in relation to their ability to pay off their loans in the future.
Alternative Credit Scoring Broadens the Image for Financial Literacy and Credibility
With the use of alternative information and data, financial institutions are not limited to traditional data sources to analyze the credit risk of the unbanked. By broadening the coverage, unbanked people (who are typically situated in hard-to-reach areas in the Philippines) can gain access to loans and credit, which may improve their financial independence as individuals. Instead of being branded as high-risk lending customers, unbanked loan applicants can be assessed correctly and competently using other factors that also represent their financial capabilities.
For financial institutions that offer consumer lending, alternative credit scoring companies now offer their services in the Philippines, including FinScore. Check out the services offered, and see how they can help you widen your targeted population coverage.