The Rise of Alternative Data Sources in the Philippines
As the demand for financial inclusion grows, alternative data sources are becoming popular tools for credit scoring companies in countries like the Philippines, where a large portion of the adult population is unbanked.
Alternative credit scoring, with the use of alternative data sources such as telco data, has proven to be more accurate and fairer in determining the creditworthiness of a Filipino. It has also made credit more accessible for the unbanked and underbanked, making financial services more inclusive for everyone.
What led to the rise of alternative data sources?
The main driving force is actually its counterpart: traditional data scoring.
For many years, traditional credit scoring agencies provided great services and outcomes for financial institutions. Some of the factors that helped them determine the credit scores of customers included:
- Credit history – Applicants with a longer credit history (i.e. those who have been borrowing and repaying loans back for many years now) have better scores as they provide more extensive data for determining creditworthiness. Data included factors such as amount owed, frequency and delay of payments, number of availed and paid loans, and more.
- Demographic data – Demographic or personal information such as age, marital status, address, affected the score. For instance, applicants in their mid-40’s had higher chances of securing loans compared to those in their mid-20’s.
- Employment details – These refer to an applicant’s employment history, salary information, and occupation or job title. For employees with lower income jobs, it was tougher to apply for loans as many institutions consider them risky investments, especially if they frequently switched employers.
Problems in traditional credit scoring
However, with the evolving domain, the way people view financing, lending, and credit has undergone a sea of change over the last decade. Be it cash-checking services, payday loans, or short-term loans, the way Filipinos access credit today is far different from what it was several years ago. In turn, lenders can no longer rely solely on traditional credit scoring factors such as demographics, employment details, and credit history to fully assess the creditworthiness of an individual, especially for the unbanked.
This led to a wide demand-supply gap for financial services and loan products. On one hand, banks and other lending institutions couldn’t advance loans due to the lack of visibility on the credit scores of applicants. Their loan approval ratio substantially dipped. On the other hand, many applicants faced rejections, even if they were financially capable of paying back the loans. They just didn’t have a lot of background data since they were new to the credit market.
What's in the future?
As alternative data sources for credit scoring continue to soar in popularity, we predict that nearly half of banks, lenders, and financial institutions will use them to make well-informed decisions more quickly.
The potential of alternative data sources is something that the financial services sector is slowly but surely realizing, and a growing number are jumping on board to take advantage. For instance, FinScore is a leading fintech company in the Philippines that has partnered with SMART Communications, the Philippines’ largest telco provider, to provide telco-based credit scoring data to financial institutions like UnionBank and Home Credit. We continuously empower the financial services sector with flexible platforms that help make reliable and insightful credit decisions.
For more information and inquiries about alternative credit data sources, contact us today.
