Pablo Viguera
Co-CEO & Co-Founder
Belvo
/
Startup Contributor

The Potential of Alternative Data Sources for Lenders

By Pablo Viguera | Thu, 07/14/2022 - 11:00

Access to credit continues to be one of the main challenges in Mexico when it comes to substantive and real financial inclusion. According to data provided by the CNBV last year, Mexicans continue to resort to informal instruments to acquire financing, all because the requirements are lower and there is greater flexibility with the granting of credit, compared to banks or government-regulated lenders.

In addition, the same report shows that access to finance is positively associated with living in urban localities, having more schooling, having a formal job, receiving a higher salary, and being male, ​​leaving huge portions of the population out of the credit placement funnel.

If we add to this the fact that many risk and credit rating models still depend only on historical traditional credit scoring information and manual processes sensitive to human error, it becomes quite clear that the diversification of information sources and the improvement of processes will be the key for more people to gain access to credit and formal financing.

New Sources of Information

With a firm mission to help lenders overcome these complications, open finance solutions are now becoming one of the most useful and efficient tools in the financial ecosystem.

The broad vision that these solutions offer to financial innovators goes beyond the logic of only accessing banking information.

With these new models, lenders will have a much clearer and more detailed picture of their potential customers: credit risk assessment models can be strengthened by taking advantage of transaction history in savings and checking accounts, analyzing the relationship between income and expenses to build a risk profile in seconds, and identifying indicators based on spending patterns found in bank transactions.

In addition, they will now have access to tax information when connecting to the SAT in Mexico, to all the data extracted from gig economy platforms, such as Rappi or Uber, or even information on insurance or investments.

This information will serve as the main catalyst for evolving existing risk models and credit underwriting, as it will integrate more components of people's financial lives into these models. This will allow consumer data and transactions outside of traditional financial institutions to provide more complete and realistic profiles.

New Audiences

Another pragmatic way to take advantage of these alternative sources of financial information is undoubtedly to attract new audiences. With the CNBV's perspective that credit is only successfully offered to a limited population, using the data extracted from open finance will be the right key to provide tailored and more inclusive credit offers.

With this data, people with a non-existent traditional credit history or a low credit rating will now have access to credit products with much more affordable rates. In addition to this, customers who already have a positive track record will have the ability to increase their credit lines, which generates greater profitability for lenders.

With access to new sources of information, lenders can build products that are better adjusted to their prospects' actual consumption patterns and financial situation. For instance, thanks to the ability to verify their income in real time, they are now able to offer them new lines of credit for which they were previously ineligible due to the lack of a more complete credit history. As a consequence, lenders can decrease their default risk and lower their rates.

Thanks to this, institutions will be able to define a wider variety of customer personas, which can have a direct impact not only on inclusion, but also on the adjustment of rates. For businesses, it is possible to see the potential for variable interest rates according to the user's profile.

A Secure Platform

Perhaps the issue that creates the most discomfort for lenders and financial institutions in general is data security and handling. In countries like Mexico, where fraud is among the crimes on the rise, the protection of user data and the secure handling of this information is undoubtedly the most sensitive issue.

For these reasons, at Belvo we have focused on developing a platform with the best standards in the market, which complies with all the necessary regulations, and we have an ISO27001 certification, which accredits us as a platform focused on the management and care of user data.

The solution that is within the market's reach for this muddle in the current credit context, both for fintechs and for financial institutions that are already traditional in the market, passes directly through open finance.

By bringing together these three new possibilities for lenders, open finance has established itself as the best infrastructure solution for this industry.

It is necessary to know the customer better through data: with this, it is possible to make better offers to existing customers, ensure more security in decision-making for institutions, and provide access for the new consumer.

Photo by:   Pablo Viguera