ONE OF THE BIGGEST challenges within the global financial industry is helping people with little-to-no credit access to get into the credit system to create more inclusive, robust economies. Globally, about 1.7 billion adults remain unbanked or without an account at a financial institution or through a mobile money provider, according to the World Bank.
The challenge is even greater in emerging economies such as Argentina, where 42% of citizens live below the poverty line, and financial institutions look to reach more unbanked and underbanked consumers.
Fintech Times recently reported that in order for the unbanked to gain access to the financial services they need, the data relied upon in verification processes needs to expand to include more modern sources.
“When we consider somewhere like Argentina,” reported the Times, “the data shows how 51% of residents remain unbanked, yet 76% are active social media users, demonstrating the disparity between how data is being created, and the data sources that are being used to provide consumers with basic needs.”
Boosting financial inclusion can be pivotal to building market strength in South America, yet the size of Argentina’s credit to the private sector was the lowest in the region in 2020 at 10.5%. By comparison, Chile’s domestic credit to the private sector stood at 124.5%, Brazil at 70.2% and Mexico at 38.7%, according to the World Bank.
In a recent regional project, Equifax partnered with five major financial institutions across Argentina to evolve their analytics models by layering anonymized alternative data sources on top of traditional data. The goal was to enable a better understanding of consumers and uncover hidden opportunities for credit access to those who are currently excluded. These deeper insights, using machine learning techniques, could allow banks to make better, more personalized credit offers to a wider audience of consumers, including those deemed near-prime, subprime or unscorable.
“A significant hurdle in opening access to credit in Argentina is getting people who are unbanked into the system,” says Matias Juan Karmelic, Equifax director of Studio B, the analytics hub for LATAM. “Consumers in this emerging economy struggle with establishing a documented history of payment behavior, so it is difficult for banks and other lenders to make sound predictions on abilities to satisfy personal debts. Use of alternative data in decisioning could be a game-changer here.”
By delivering differentiated data and analytics that “Only Equifax” can provide during the three-month project, Argentina’s participating financial institutions achieved an average 35% improvement in predictive capacity. “This improvement could mean as much as a 17% increase in credit approvals for the unbanked population,” said Karmelic. “These models could enable stronger access to credit for Argentina’s underserved and underbanked populations, and help this region build a more inclusive economy.”
During the project, Equifax tested new algorithms ー called RandomForest, XGBoost and LightGBM ー that allowed Equifax data scientists to increase predictive capacity in their analytics models. These new Equifax algorithms are similar to what’s deployed in developed nations, and have the potential to help millions gain better credit access.
“Equifax believes alternative data will play an increasingly important role in the financial profiles of consumers throughout Argentina and globally, and we will continue to work with institutions to identify new data sources that expand access to credit and elevate financial inclusion,” said Karmelic. “Through cloud-native technology, artificial intelligence and other innovations, we are driving insights that power decisions to move people forward, and supporting businesses in bringing more credit-invisible consumers to light.”