By Ana Olivia A. Tirona, Researcher
IN THE COMING YEARS, banking for the ordinary and the underbanked Filipino can be made easier and accessible even with minimal resources. The fast pace of digitalization in the banking sector calls for alterative ways and opportunities that consumers should be entitled to.
This could also mean that a regular smartphone can be a great tool for those who aim to up their credit game.
The central bank has laid out a six-year-long plan to extend the reach of financial inclusion to the vulnerable parts of the Philippines. Launched on Jan. 28, the Bangko Sentral ng Pilipinas (BSP) released its National Strategy for Financial Inclusion (NSFI) for 2022 to 2028.
“Financial inclusion is a state in which everyone, especially the vulnerable sectors, has effective access to a wide range of financial services,” the report said.
“Effective access means not only the availability of financial products and services, but that these products and services are appropriately designed, of good quality, and responsive to the varied needs of individuals and businesses — whether for saving, payments, financing, investing, or getting insured,” it added.
Thus, creating more options allows more interested Filipinos to become banking confident.
One of the initiatives to be prioritized by the central bank is the use of “alternative data” for credit evaluation.
In a webinar by the FinTech Alliance Philippines and TransUnion in January, BSP Governor Benjamin E. Diokno said one example that can benefit consumers for credit assessment is the use of alternative data.
The World Bank Group defines alternative data as information harnessed from modern data sources. These data are retrieved from social media, mobile data, utilities data, behavioral data, online transactions, geolocation data, and browser data, among others, usually not collected by the financial institutions.
In a paper authored by Peter Caroll and Saba Rehmani titled “Alternative Data and the Unbanked” from the American consulting firm Oliver Wyman, they cited that those who have no credit scores are called “credit invisibles.” These individuals may not be holding any credit file, or they currently hold one but do not have sufficient recent information to generate a credit evaluation.
Creditworthiness or credit score is a measure of one’s ability to pay back debt. This is where alternative sources of data can benefit the vulnerable sector of the country who wish to take out a loan.
“Traditionally, credit scoring factors in data which are stored in banks and credit bureaus, and includes payment history, credit utilization rate, length of history and credit mix among others. Potential borrowers, however, may have limited or zero credit history,” the BSP said in an e-mail to BusinessWorld.
The use of alternative data as a means of assessment is not new to the banking sector, the central bank said. Credit scoring firms in the US have been using nontraditional data to generate credit risk profiles for companies. However, this was not immediately taken in as a method by most firms.
“With the emergence of big data and machine learning technologies in the last decade, there is now an opportunity to harness alternative data to enhance credit evaluation,” the BSP said.
ALTERNATIVE DATA FOR THE UN(DER)BANKED
The 2019 Financial Inclusion Survey by the central bank cited that seven out of 10 Filipinos do not have a transaction account. This is equivalent to about 51.2 million adult Filipinos who are still unbanked.
“Financial inclusion necessitates financial products and services be appropriately designed according to the specific needs, capabilities, and context of individuals and businesses, especially those in the vulnerable sectors. The disadvantage of the unbanked and underserved Filipinos is that they have little or no financial transaction data, which is typically used as basis for developing a customer profile,” the BSP said.
Notably, the Bankers Association of the Philippines (BAP) fully supports the priority initiative of the central bank in terms of alternative data use.
“The use of alternative data in assessment for purposes of credit is on the table of discussions in the BAP. The BAP was supportive of this initiative when proposed in the House Committee on Banks in Congress. We contributed to the exploratory talks and was responsible in opening the eyes of Congress to the concept of Big Data as the technology that will drive behind alternative credit rating framework,” BAP told BusinessWorld in an e-mail.
“In this time of technological surge and various social media platforms, we are confident that the banks are building and incorporating their own alternative sources of data in their assessment of a borrower’s creditworthiness. The use of which will still have to be consistent with regulatory requirements and international best practices,” it added.
In 2019, CIMB Bank Philippines partnered with Singapore-based fintech CredoLab for a more inclusive way of assessing an individual’s borrowing capability. The mobile application CredoApp was created for the purpose of streamlining loan applications through a smartphone’s metadata.
The app’s bank-grade algorithm enables a consent-driven analysis to form a predictive behavioral pattern, which can be instantly converted to a person’s creditworthiness.
More recent developments were carried out by Tonik Digital Bank Philippines by teaming up with alternative credit scoring company FinScore in 2021. The credit company used telco data by harnessing a device’s data and voice usage, top-up patterns, location, and SIM card age.
However, the adoption of alternative data for evaluation is still static.
In September last year, the BSP’s Financial Inclusion Office conducted a rapid survey distributed to 146 financial service providers (FSPs). One in four FSPs said alternative data was used to generate a person’s debt-paying ability score. The BSP noted that this was true among various financial institutions and nonbank lending companies. In spite of that, more than half of fintech firms are already utilizing alternative data.
“Despite the current low adoption of alternative data, 127 FSPs or 87% of all survey respondents believe that the local financial industry will use alternative data more extensively moving forward. Aside from using alternative data for credit scoring, future use cases include pricing of financial services, setting of credit limits, and fraud detection,” the BSP added.
RISKS AND POSSIBLE CONFLICTS
In terms of regulatory practices, for the use of alternative data to be deemed credible by financial institutions, the BSP shall maintain the strict implementation of guidelines on the credit risk management system.
“The principles and practices for sound risk management are expected to be embedded in the BSFI’s (BSP-supervised financial institution) credit scoring/evaluation process, which would cover the use of alternative data,” the central bank said.
“Any scoring model therefore should undergo regular review and back-testing by the BSFI, as well as validation by a third party which has the expertise to evaluate the accuracy and predictive ability of these models. The BSP reviews the results of the third-party validation and if needed, can challenge assumptions and comment on parameters used in the model,” the BSP said.
“The use of alternative data is also governed by regulatory expectations on consumer protection under Section 1002 of the MORB (Manual of Regulations for Banks). For instance, well-intentioned algorithms that inadvertently discriminate against specific groups of consumers must be avoided,” the BSP added.
However, the BAP flagged the possible risk against the Data Privacy Act of 2012.
“Proper mechanisms shall be in place to ensure that customer’s private information is not used for purposes against their interests. The customers should be educated and informed and must also consent on how their data is being used. More importantly, customers have opt-in and opt-out mechanisms if they decide to withdraw or modify the scope of their consent in the open finance ecosystem,” BAP said.
In other terms, the use of alternative data can be a conflict towards the data privacy act. As such, the BSP ensures all policies and regulations will be strictly administered in accordance to the protection of “fundamental human right of privacy, of communication while ensuring free flow of information to promote innovation and growth.”
EXPANDING INCLUSION
Latest available data from We Are Social’s Digital 2022 showed that about 98.8% of adults ages 16 to 64 own a smartphone. In an annual basis, its increment grew by 0.3%. Significantly, 27.9% use applications related to banking, investment, or insurance each month; 21.4% use payment services each month; and 19.4% own any form of cryptocurrency.
The continuous penetration of digitalization through smart devices and the internet generates alternative data that can be utilized for the user’s benefit.
“Over the years, the demand for alternative data has become increasingly prevalent and has undeniably transformed the global landscape — politically, socially, and economically. For instance, some financial institutions have resorted to data from social media engagements to facilitate a more comprehensive credit scoring analysis,” the BSP said.
With the vision “toward inclusive growth and financial resilience,” alternative data is just one of the priority initiatives BSP wishes to take on.
“Under the Open Finance Framework, the BSP envisions an ecosystem that will benefit from the use of alternative data, particularly in driving the development of more customer-centric financial products and services. Alternative data offers a different perspective in evaluating consumer preferences and activities, which allows deeper understanding of factors that affect behavior,” the BSP said.
Furthermore, the BSP ensures data collection process will follow through regulations and standards that are consumer-centered.
“The Open Finance Oversight Committee Transition Group, working alongside the BSP, will spearhead the development of these standards and protocols to ensure that the Open Finance ecosystem provides a safe, secure, and interoperable financial system,” the BSP said.
There are benefits to the use of alternative data. The Oliver Wyman paper said: “Having more data is only valuable if it results in real incremental benefits; in this case, the benefits of using alternative data in addition to traditional bureau data, beyond just technical improvements to the credit score, should flow to both consumers and lenders.”
Such benefits will affect both potential and existing borrowers. The chance for interested borrowers will more likely increase. Similarly, existing borrowers would be granted possible lower interest rates.
In the long run, the NSFI six-year plan will reap benefits and more opportunities for the unbanked and underserved.
The central bank dissecting the already-available resources or data most Filipinos now have, would highly increase the chances for better banking.
“Other use cases include statement sharing or account aggregation and direct debit payments or fund transfers. This data-sharing framework can also facilitate financial inclusion and MSME access to finance as it provides information to third-party financial service providers through application programming interfaces (APIs),” the BSP said.
“Existing regulations notwithstanding, the provision of regulatory guidelines specific to the use of alternative data for credit evaluation may further promote its adoption toward greater financial inclusion,” the BSP said.
Likewise, BAP commits to maintaining the practice of adopting policies and measures that could prevent consumer’s financial data to be at risk.
“The BAP understands that digitalization and technological innovation is key to expanding financial inclusion in the country. By providing every Filipino greater access to financial products and services — with savings accounts and personal loans as a starting point — will drive the economy to grow and recover from the crippling effects of the COVID-19 pandemic,” it said.