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  • How technology is bringing society’s credit invisibles into the light 22, May 2018

    Recently, Oakam was featured in a special report from The Economist on financial inclusion and fintech. The report focused not just on how technology is expanding financial access to the underserved in developing economies, but importantly, its transformative effects on inclusion closer to home in the ‘rich world’ as well. While growing markets like Nigeria and Bangladesh have been able to leapfrog to new technologies to power more inclusive banking systems, mature countries have a harder time modernizing the way people access financial services because the existing infrastructure has long been optimized for mainstream consumers. It is this challenge – catering to the growing ranks of the underserved in the developed world – that Oakam is tackling with rapid advancements in technology.

    The Economist piece mentioned three key ways that digital and alternative lenders like Oakam are progressing financial inclusion in places like the UK and US: “by making identity checks easier; by lowering costs; and by enabling new forms of credit assessment.” This is true of Oakam’s own digital evolution. Drawing on the immense power of the smartphone, we have been able to ease the journey of the UK’s ‘credit invisible’ consumers onto and up the credit ladder. Here’s how we’re doing it:

    “By enabling new forms of credit assessment”

    Our view is that traditional credit scoring is broken for those who are often most in need of fair credit, a central issue in inclusion that was highlighted in The Economist’s piece: “What Oakam shares with other nonprime lenders, and those in poor countries, is a willingness to look beyond the scores handed out by credit bureaus. Those data are backward-looking, ignore much non-credit history, such as regular payments to utilities, and have nothing to say about those with little or no borrowing history (“a thin file”). This often excludes potentially valuable clients: immigrants anxious to build a good reputation in their new homeland; students with bright career prospects; hardworking, trustworthy individuals needing cash to tide them over a difficult patch.”

    Instead, we take an alternative approach to credit scoring. Through our digital channels, we are able to gather and incorporate alternative data, such as social network associations, geo-location, and behavioural clues from online chats with Oakam agents and psychometric testing, to derive what we view as a more accurate, fair and forward-looking means of credit assessment.

    And it’s working. A recent study of 15,000 first-time Oakam customers found that 70 percent of new customers made on-time repayments, despite previous challenges accessing credit, indicating that traditional bureau scores aren’t incorporating enough of the right data to make fair decisions about a borrower’s risk. Further, our work to digitize psychometric testing through AI have begun outperforming human underwriters in eight out of 10 assessments. The potential of machines to accurately judge behavioral attributes like character paints a promising picture for the future of credit scoring that is applicable to a larger slice of the population.

    “By lowering costs”

    In the pre-digital world, micro-lending required an expansive retail presence or a small army of loan agents to disburse funds and collect payment, both expensive operating models that led to the industry’s 50 percent plus cost-income ratios and a higher ticket price for borrowers. Mobile devices have made it possible for us to lower the cost of sourcing and retaining customers, and of delivering and servicing a loan, an advancement that we’ve been able to pass along to our customers in the form of more affordable funds. Today, our cost-income ratio is moving downward towards 40 percent.

    Importantly, the near real-time data exchange that smartphones allow us to have with our customers has enabled the introduction of a new dynamic in micro-lending: we’ve put the customer in charge. Our gamified mobile app draws on behavioural economics to ‘nudge’ or reward customers towards particular actions that represent good financial habits. For example, if a customer makes an on-time loan repayment, they’ll acquire points. If they don’t, they won’t be penalized but it offers us a clearer indication of their ‘riskiness’.

    These tech-enabled behavioural insights help us to better identify the characteristics and habits of ‘good’ customers. Armed with this information we are able to enhance our underwriting to offer customers more accurate, competitive rates.

    “By making identity checks easier”

    In 2017, net migration to the UK stood around 230,000. For many of these individuals, providing adequate proof of identity creates an added challenge in qualifying for a bank account, mobile phone contract or loan. While we do require all applicants to have an active UK bank account, because we receive most of our loan applications via our website, we are able to use technologies such as location-based services, and social network associations – which show an applicant’s relationship to other Oakam customers – to complete identity verification and rule out fraud in real-time.

    While we’ve made considerable progress to make micro-credit more affordable and accessible through the use of technology, to reach the next phase of innovation in financial inclusion we need to descend to the infrastructure layer of the industry. Are the legacy systems and rules that were built in a different era adding to the price tag of a micro-loan? Why does it cost more to run a mandatory credit check on a £200 loan than it does for a £200,000 mortgage? And if credit bureau data carries very little weight in a micro-lenders decision to provide a loan, should it still be a mandatory step in the underwriting process?

    Modernizing such deeply-rooted infrastructure is no small task, but through collaborative innovation across government, industry, regulators, policymakers and other interest groups, we can progress financial inclusion in the ‘rich world’ at much faster clip than is possible alone. We look forward to being an integral part of this journey.