The Financial Inclusion 2020 campaign at the Center for Financial Inclusion at Accion is building a movement toward full financial inclusion by 2020. Accordingly, this blog series will spotlight financial inclusion efforts around the globe, share insights coming out of the creation of a roadmap to full financial inclusion, and highlight findings from research on the “invisible market.”
Just imagine for a minute. You are in your late 20′s and about to go on a second date. You are really looking forward to it; after all, your date is attractive and shares your interests. Everything seems to be going great, until your date brings up his/her excellent credit score and then asks about yours. What do you say?
A recent article in the New York Times, “Perfect 10? Never Mind That. Ask Her for Her Credit Score,” inspired this scenario. When my boyfriend and I applied for our lease, naturally we talked about credit scores, as it was a part of the application process. Luckily, we were okay. But, I can see how this could be contentious for a couple if one person has a poor credit score.
While a credit score should not be a “deal-breaker,” as one interviewee suggests, this article provides evidence that the perceived value of a credit score is taking unexpected turns among younger adults in the United States.
This is good news and bad news for champions of credit reporting. On the one hand, it shows increasing awareness of the importance of a credit score. On the other hand, credit bureaus don’t want to be seen as the bad guys. For those who are pushing to use credit reporting to include people in financial systems, it doesn’t help to have a bad rap about the ways negative credit reporting can kill not only a financial dream but now a dating relationship as well! Champions of credit bureaus would much rather focus on how a credit history can be used to give people access to credit and protect them from over-indebtedness.
But what about those who have no credit history?
There is hope, according to Michael A. Turner, Ph.D., President and CEO of Policy and Economic Research Council (PERC) and a member of CFI’s Credit Reporting Experts’ Working Group. Michael points to the use of alternative data sources to build a credit history, saying that “technology and data on clients are there.” PERC and the Brookings Institution together have identified that in the U.S. utilizing positive credit reporting increased credit access by 22 percent for Hispanics and Blacks and by 14 percent for young and elderly Americans.
What potential could a similar approach hold for the underserved around the world? In one example from the Consultative Group to Assist the Poor (CGAP), many low-income clients “have access to retail credit or to post-paid utilities” long before they have access to formal credit. Including these providers in credit reporting can be highly beneficial in establishing credit histories for those who have not had access to credit. For example, the use of utility bills already occurs in some countries across Latin America, as retailers have a history of collecting and sharing payment data on both individuals and firms. Rather than using poor behavior to blacklist people, positive credit reporting— such as tracking payments of utility or telephone bills on time—offers an opportunity to further build a credit score instead of harming it. Typically, negative behavior is given much more attention than positive behavior. This demonstrates a shift to positive reinforcement.
Simple, a financial services startup, offers clients an online platform for free checking, and an extensive data analysis of client transactions and spending habits are actually shared with the client. That’s a topic for another blog post, but it underlines the influence of big data. Another financial services startup, DemystData, uses alternative data from over 50 sources to assist financial institutions in a more comprehensive credit evaluation of prospective clients. Along with financial data, they also utilize social media data sources which include Myspace, LinkedIn, Facebook, Google Plus, and Twitter.
Some see this as creative, cost-effective, and the great hope for millions of excluded people. Others see it as creepy. Romantic partners use their intuition to decide when and how to broach potentially sensitive topics. Businesses, however, must follow clear and transparent standards of client protection and confidentiality. Alternative data sources for credit reporting can help provide a path to inclusion for many, but these innovations must go hand in hand with protecting clients from intrusive uses of data.
For more information on Financial Inclusion 2020, and to explore becoming roadmap contributors or reviewers, sign up for campaign updates.
Image credit: On Your Side Debt Relief
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