Without a doubt, this is the question that interests our clients and prospects the most. In this edition of FinScore Answers Questions, Mr. Christo Georgiev, FinScore Country Manager and Chief Strategic Officer, discusses the impact of COVID-19 and the Enhanced Community Quarantine (ECQ) on credit scoring in the Philippines.
Impact on Credit Scoring in the Philippines
In order to make educated conclusions, let’s take a quick look first at the differences between Traditional & Alternative Data Credit Scoring. Then, we will zoom into Telco Credit Scoring.
Starting with the basics, when it comes to the subject of Predictive Analytics, Scoring is all about information – information about the correlation between the past behavior of an individual and their future behavior.
Traditional Credit Scoring Models
In traditional credit scoring models, based on social demographic factors (age, gender, address, income) or past financial history, it typically boils down to a combination of the following factors:
- Does the borrower have a steady job? Does the borrower have a steady income, proven through documentation that indicates full-time employment?
- Is the borrower among the high-risk segments of the population? When it comes to a combination of factors such as age, gender, and address of residence. In other words, do they fit the profile of someone who would not repay a loan?
- Does the borrower own a credit card and received similar or other loans in the past? If yes, then did they repay them? Were they ever late with an installment or failed to repay a loan?
To assess a borrower’s creditworthiness, all of these pieces of information feed into the credit scoring models that financial institutions use. Typically, each of the different data sources has its own scorecard and all in combination amount to ONE, BIG, POWERFUL CREDIT SCORE of the borrower.
Telco Credit Scoring Models
Precisely here is where Telco Credit Scoring plays its modest yet fairly powerful role in the process. The behavior, captured on the network of mobile network operators, has several unique and powerful attributes:
- It is objective – provided by a 3rd party and not self-reported
- It cannot be amended, falsified, or manipulated.
- It provides near-real time insights about changes in the subscriber behavior.
- It is equally available for all subscribers – regardless if they use a feature phone or a smartphone, prepaid, or postpaid. This is super essential in developing markets such as the Philippines and South East Asia;
And most importantly, it captures trends in the consumer behavior, even in the absence of past financial history.
Therefore, in better terms…
#1 Compared to information used in traditional models,
Telco Credit Score captures a different type of behavior-
an additional dimension of the borrower’s profile.
Traditional Credit scoring models may deem an individual as ineligible for a loan. For example, a PHP 150,000 loan may be rejected since borrower “A” does not have any past financial history.
However, what if their behavior and risk profile on the telco network show steady top-ups for extended periods of time, long-standing subscriber relationship and lots of active connections? These factors are invisible to the financial institutions & credit bureaus.
So, by applying Telco credit scoring on top of traditional scoring models, borrower “A” could be approved for a smaller loan of up to PHP 50,000. There goes your financial inclusion, increased approval rate without affecting your risk appetite and access to credit on individual level. It is a triple-win!
#2 Telco Credit Score is more fluid and volatile but
provides insights on near real-time basis
A credit bureau or a financial institution will consider a loan as defaulted after a fairly long period of non-repayment (sometimes, depending on the loan product – up to 3 months after repayment was due).
Products like the Telco Credit Score Portfolio Health Check will tell you they changed numbers /reduced consumption within a week or two after it occurs, thus triggering collection efforts way before the loan became NPL.
Now, to answer “Would Telco Credit Score still work after the ECQ and COVID-19 completely changed the economy?”
None of these fundamentals have changed with COVID-19.
The credit scoring model will still consider the behavior on the telco network and assign the appropriate band and score to subscribers. If the subscriber consumption dropped, their score and band will be lower. If it remained the same, the score and band will also be the same. If our monitoring tools and procedures detect any anomaly in the score stability and data distribution, we will adjust the score instructions to match the new reality.
What will change very likely in the future is how banks and financial institutions handle the loan underwriting process on their side. They will likely have to set their approval cut-offs more conservatively based on traditional data.
More than ever, there will be a need for additional dimensions of information to fine-tune approval strategies and ensure the optimum balance between protecting their depositors’ interest and not letting business opportunities go elsewhere.
FinScore will be there to support organizations throughout this process by rigorously improving current models and building more innovative telco-powered products. We can help in bridging the financial inclusion gap for borrowers while providing tremendous added value for loan underwriters.
To know more about FinScore advanced data analytics, alternative data credit scoring, and fraud prevention services. Contact the FinScore team here.
About the Author
Country Manager and Chief Strategic Officer, FinScore
Christo is an experienced digital entrepreneur and operations executive. He has a special affinity towards digital payments, assets and currencies. Prior to joining FinScore, Christo was in charge of operations across several verticals in the i-Gaming industry both in Philippines and internationally.
FinScore is an alternative credit scoring company that offers a powerful credit scoring platform and fraud detection tool based on alternative data, including telco-based data. As the pioneer in lending and scoring of the unbanked in the Philippines and Southeast Asia, they continuously empower banks, financial institutions, and credit bureaus with flexible platforms to help them make insightful and reliable credit decisions.