Loans (and more) that ride on your digital exhaust
While micro-finance has been useful in consumption smoothening and micro-enterprise, by financing small assets, it is still difficult for a person with an informal economy asset or income to get easy access to credit
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Have you tried firing your koora wali (garbage collector)? Or move to another presswalla (guy who irons clothes in the neighbourhood) in the same locality? Most Indian cities (may not be true of the relatively new gated bubbles of Indian suburbia) have a system where there is an informal ‘right’ of a person or a family to a certain set of houses for some informal services. And usually, it is not so easy to replace them, because they ‘own’ the right to service it. In a way it is their ‘asset’.
More that 15 years ago, when I was on a longish baby break from a full-time job and was researching ideas for a paper on how to make credit reach the informal sector, I remember having a conversation with my newspaper vendor. He said that his ‘right’ to vend newspapers to over 400 houses in a south Delhi area was ‘marketable’. He could ‘sell’ this right in the informal market. I asked: could he get credit from a bank, leveraging his ‘asset’ that was the informal, but real, right to vend? He looked at me as if I was crazy. It had not even crossed his mind that this was possible. He finally said, “Hum jaison ko kahan milta hai loan (where do people like me get a loan).” I’d just read Peruvian economist Hernando de Soto’s Mystery of Capital, Why Capitalism Triumphs in the West and Fails Everywhere Else, where he argues that those outside the ‘bell jar’ of having legal assets are not really asset-poor; it is just that existing laws do not recognise these assets. He was keen to explore solutions for financial inclusion. Fifteen years later, it looks as if fintech and big data will achieve what years of policy intervention could not.
While micro-finance has been useful in consumption smoothening and micro-enterprise, by financing small assets, it is still difficult for a person with an informal economy asset or income to get easy access to credit. I remember speaking to the chief executive officer of a housing finance company that focuses on low-cost housing loans. Most of its borrowers do non-salaried work. An auto driver, a barber, a beauty parlour worker, a noodle vendor. So, the noodle vendor in a Gujarat city wanted a home loan. He claimed to have been selling the ‘tadka maar ke Indian version’ of noodles for over 10 years at his spot. The loan team went for verification. They found the cart where the vendor had said it would be. The wheels were half covered in mud; it had obviously been standing there a long time. The neighbours vouched for the vendor and his roaring business. The loan was cleared. But physical verification is costly—both in terms of verification and monitoring of the verification team.
Big data is beginning to solve some of these issues. I met with Richard Eldridge, co-founder and chief executive officer of Lenddo, a social authentication and scoring technology platform that uses non-traditional data, 2 weeks back on the sidelines of the World Economic Forum’s India Economic Summit in Delhi. Traditional credit rating mechanisms use information on credit history, repayment habits and borrowing history to give a score to a person, which determines her creditworthiness. But the financially excluded, and those in the informal sector, find it difficult to even get a step into the world of formal credit rating. Eldridge is using non-traditional data, such as social media footprint, mobile data, GPS logs and other fumes from the digital exhaust to get a score to help a lender decide if you are creditworthy.
Eldridge says the technology uses an algorithm that crunches an individual’s digital exhaust. For example, if a person says he runs a shop in an area, his GPS records will show his travel details. Does he actually go most days to the location of his shop? Does he actually live where he says he does? A peer-to-peer lender I met a few months ago said his firm uses social media accounts to verify things like date of birth. Have people wished the guy on his Facebook page on the date he has given as date of birth?
Sounds intrusive? It is. Some of this is consent-based access, but there are others who control your digital exhaust through the boxes you tick when you download free apps and through other ‘free’ stuff like email. In the time to come, the issue of ownership and control of our digital exhaust will become centre stage. There will have to be cases where the intrusion is so severe that rules will get framed around it. The fintech genie is out of the bottle and will be put to uses good and bad. The rush of tech is so strong that rules will always be a step behind. For the financially excluded, handing over their digital exhaust to firms, which will enable them to access finance, will do what banks have been unable to do for decades. For the rest of us, thumbing away on the apps and occasionally looking up to worry about the safety of our exhaust, it will take few accidents for some rules of the game to emerge. Till then be careful of what you tick. And be good!
Monika Halan works in the area of consumer protection in finance. She is consulting editor Mint, consultant, NIPFP, member of the Financial Redress Agency Task Force and on the board of FPSB India. She can be reached at email@example.com.