It is an exciting time at the nexus of technology and financial services. For assessing creditworthiness, for example, there are now tools available that move beyond traditional methods. Financial service providers are able to identify high potential, low risk entrepreneurs through Entrepreneurial Finance Lab’s (EFL) psychometric testing, which assesses a borrower’s character, abilities, and attitude. DemystData uses the big data available about potential customers to help financial service providers evaluate and validate their loan applications. Along with these two groups, there are many more entering this space, harnessing technologies and data types once separate from financial services to better understand potential clients.

In recent news, banks in Russia are now using GPS to assess borrowers’ credit ratings. Yet-to-be-disclosed banks in Russia have signed an agreement with AlterGeo, the “Foursquare of Russia,” to build a “picture” of users through their location services. At this time it remains unclear what specific information will be collected and how it will be assessed.

I confess to being an enthusiastic proponent of using technology to help financial service providers find new avenues for expanding inclusion opportunities. Yet this news out of Russia gave me pause. Anton Baranchuk, CEO at AlterGeo, says their platform “allows our partners to learn more of their potential borrowers’ honesty and reliability in order to reduce risks when working with online credit loans.” Using locational data and activity to assess a potential borrower’s honesty and reliability seems like a stretch – as well as a very slippery slope to me – and one that would involve more, not fewer biases.

I write this blog post out of Boston, Massachusetts and find it very hard to understand exactly what that location says about my honesty and reliability. If I were in a poor neighborhood, would that make me more or less honest and reliable than someone in a wealthy neighborhood? If I “checked in” to more dive bars than upscale coffee shops, does that tell you everything you need to know about my creditworthiness?

Luckily this news is out of Russia and so far away from me. Users in Russia willingly download AlterGeo, which begs a core big data client protection question – how much do you really know about the apps you download, the information they collect about you, and who they share that data with? Do you just quickly accept the licensing and user agreement like I do? As for AlterGeo, we’ll stay tuned for more details to surface.

Image credit: Eric Fischer

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842 million people struggle through the hunger games yearly. The games begin as food and money run low sometime before harvest and last until the first ripe crops. This is better known as los meses flacos, the thin months, in Latin America. Or as I knew it in East Africa, wanjala in Swahili and nyengo yonjala in Chichewa (the hunger season). These recurring hunger games are not state sponsored and the participants do not fight each other to the death, but they do fight individuals, families, or communities to survive. Every day, 25,000 people around the world die from hunger-related causes, including 16,000 children. That’s one child every five seconds.

The regions deeply affected by hunger depend heavily on smallholder farming. Around 75 percent of the world’s poor are smallholder farmers. Half of the world’s undernourished people, including three-quarters of Africa’s malnourished children and the majority of those living in absolute poverty live on small farms.

Many of these farmers face the struggle of the hungry season. To understand their situation, consider how you would budget if you were only paid a few times a year.

Personally, I struggle with budgeting when paid twice a month. When I was in the Peace Corps in Malawi and was paid monthly, I struggled even more. Yet, smallholder farmers often receive payment only during harvest, or twice a year. I still do not fully understand how families survive with this income structure, even though I lived in a rural town in Malawi for two years. Yet, this is the reality for many of the 2.5 billion people that depend on smallholder agriculture for their livelihoods.

I have never felt as helpless as I did during the hunger seasons I experienced in Malawi. While Peace Corps Volunteers were training people on bed nets and safe sex, some people in our communities used mosquito nets to fish and others thought about the monetary value of sex. The priorities targeted by outside development experts sometimes felt nonessential when basic needs like access to food weren’t met. After Malawi, I came back to the United States cynical about international development and its ability to have a real impact. But soon after my return I learned about financial inclusion and its potential to help solve the budgeting crises of smallholder farmers and contribute to financial stability.

The benefits of financial services for smallholder farmers can be enormous. Without savings accounts, farmers have to transport physical cash long distances and store it unsecurely at home. Savings accounts allow funds to accumulate without the increased threat of theft, weather damage, or other shocks. Money in the bank can allow farmers to make purchases like new agricultural inputs. Lines of credit allow farmers to invest in larger agricultural inputs, like new machinery or animals. Credit can also be instrumental for weathering the hunger season, providing funds between harvests, especially right before a new season when one wants to buy new seeds, fertilizer, and other inputs. Insurance helps protect farmers against crop loss, and reduces the risk of borrowing, which in turn opens the ability to plan farther into the future.

Sadly formal financial services reach few smallholder farmers. According to the Global Findex, in Sub-Saharan Africa 12 percent of adults living in rural areas saved at a financial institution in the past year, compared to 23 percent of adults living in urban areas. Estimates for 2011 indicate that smallholder farmers took out roughly $9.4 billion in loans, while the demand for financing could have been as large as $450 billion, according to Dalberg Research.

Physically reaching the unbanked is one of the core challenges of financial inclusion – a barrier that’s heightened in extending services to rural areas. To put it simply, it’s costly for providers to extend branches to rural areas. Another challenge is designing financial services that fit the needs of both the financial institutions and the farmers.

Advancements in technology and product design are now starting to create rapid growth in rural financial services. Mobile money services like AgriLife in Uganda allow subscribers to receive payments from buyers or farmers cooperatives directly through their phone. Other advancements in portability include Opportunity International’s portable banks-on-wheels, Entrepreneurial Finance Lab’s smartphone/ tablet-based credit application for agent banking, and M-KOPA’s mobile phone-based asset financing tool.

When it comes to credit, smallholder farmers’ financial footing leads to difficulty with most lenders’ collateral requirements, rigid payment schedules, and short loan durations. Of the $9.4 billion in loans disbursed to smallholder farmers in 2011, 90 percent was for short-term financing. However, new products better suited to farmers needs are generating promising results. Lenders know  that monthly repayment is more efficient than weekly repayment, if it can be done without sacrificing repayment rates. Member banks of the China Association of Microfinance have successfully incorporated flexible repayment methods in their loan products to farmers, as well as larger loan amounts and alternative collateral. Non-traditional insurance products are also gaining traction, like a microinsurance product in Ghana that uses airtime and offers loyalty benefits.

Yet, budgeting for the hungry season is hardly the only challenge smallholder farmers face. In my opinion, the bigger issue is the price that small farmers can receive for their crops on the world market.

I worked with small cotton growers for a year in Malawi. Months of work led to an average production of 700kg of cotton per hectare. Most small farmers in Malawi had half a hectare and in 2012 the average price for cotton was 40 cents per kg. This meant that the average cotton farmer was paid $140 for a year’s work. The input cost was about $20 a year, leaving a net of $120. That’s not much to live on.

Thanks to producer groups, there is progress in fair pricing for smallholder farmers’ products. The Fair Trade network now includes more than 1.2 million farmers and merchants, harnessing their collective bargaining power for fair prices and increased market access. In addition to fairtrade networks, Fairtrade International, Grameen Foundation, Incofin IM, and Incofin cvso launched the Fairtrade Access Fund last year. The impact investing fund increases farmers’ market access and facilitates their adoption of financial products and technical assistance. Small scale producer groups are gaining traction elsewhere in the industry, too. A set of case studies on such groups can be found in the CARE-produced Integrating Very Poor Producers Into Value Chains Field Guide. Along with improved commercial relationships with buyers, suppliers, and financial services providers, producer groups often lead to increased market information dissemination.

On the other side of this equation, consumers can improve pricing for smallholder farmers by exercising their individual purchasing power. We rely on and want the products that small farmers provide, but often do not demand that they receive a fair price or have safe working conditions. It is time that all of us consumers recognize our effect on global markets and the lives of billions of people. Learn where the products you buy are from, follow the value chain, and demand that buyers provide a living wage to their farmers.

Image credit: Travis Lupick

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The recent Financial Inclusion 2020 conference took a very private-sector focus to financial inclusion, with headliners such as Citigroup and MasterCard CEOs, demonstrating the shared importance of financial inclusion across all types of institutions. It also illustrated the enormity of the problem at hand, and subsequently the proximity of the year 2020 by which to address it. Participants agreed that an integral aspect of this gap is solving the puzzle of how financial institutions can evaluate risk for information-scarce micro, small, and medium-sized enterprises (MSMEs), and do so while keeping transaction costs low.

Industrial and organizational psychology has been working for decades on a problem with similar characteristics: how to screen people applying for jobs. Firms must decide which individuals to hire, often based on little available information. Moreover, firms must evaluate a large number of applicants in a low-cost way, particularly for entry-level positions. In response to this challenge, industrial psychology has developed a series of assessments of individuals that predict a person’s future success in a job in an objective, quantitative, scalable way. This field, which assesses skills, abilities, personalities, and intelligence, is known as psychometrics.

Our innovation at the Entrepreneurial Finance Lab (EFL) is to use psychometrics to assess an assortment of features of potential entrepreneurs and to bring this testing method to developing countries. Starting as a research project at Harvard in 2010, we have developed a 30-60 minute automated psychometric application that incorporates the potential borrower’s attitude and outlook, ability, business acumen, and character. It can measure risk without relying on business plans, credit history, collateral, or group liability.

We recently tested a psychometrically-enhanced loan application with Financiera Confianza, a lender serving MSMEs in Peru. We compared applicant responses to self-reported sales, subsequent loan repayment performance, and credit bureau data. We then created a scorecard based on that information using data from other countries and evaluated its effectiveness on a sample of business owners seeking loans. The psychometrically-enhanced application performed extremely well in predicting default—those MSMEs rejected by our scorecard had a probability of defaulting up to four times greater than those accepted. (Click here for our full results.)

Other tests have showed that our psychometrically-enhanced application is able to meet and exceed the predictive power of credit scoring models in developed countries. It has now been used in over 50,000 loan applications in 20 countries, expanding access to credit for promising entrepreneurs who may lack the collateral, personal networks, and formal business training otherwise needed to secure a loan. Non-traditional data such as psychometrics should certainly be counted among the new tools available to financial providers, in addition to those discussed at FI2020.

Bailey Klinger and Asim Ijaz Khwaja are co-founders of the Entrepreneurial Finance Lab, and DJ DiDonna is Chief Operating Officer. Khwaja, a Professor of International Finance and Development at the Harvard Kennedy School, will be offering a week-long executive course together with Rohini Pande (who blogged for us earlier this year) this February on “Rethinking Financial Inclusion: Smart Design for Policy and Practice”. 

This post was modified from its original version on November 25, 2013. The original version incorrectly indicated in the fourth paragraph that those rejected by the EFL scorecard had a probability of defaulting up to four times greater than those rejected.

Video credit: FOMIN Member of the IDB Group

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Four Ways Big Data Will Impact Financial Inclusion

Innovations in Portability for the Developing World

Designing Microfinance for the Borrower’s Well-Being

Providing financial services to entrepreneurs is a challenging operation in developing countries where small businesses may be isolated in a rural village without reliable roads or internet coverage. Service providers must pay the high costs of employing staff to reach out to remote villages while capturing limited revenue from small-scale products. Yet entrepreneurs in these regions need tools like credit and insurance to make investments and grow their businesses as just as do their counterparts in more developed regions.

Mobile phones are changing the financial landscape helping to expand the possibilities of service models. With novel mobile solutions to bridge the financial access gap, innovators can provide entrepreneurs with new tools and opportunities to support their businesses.

Here are a few cutting-edge models rendering financial services more portable:

Portable Bank. Opportunity International (OI) is putting its bank on wheels. With a portable bank that offers savings, loans, and other such financial services regularly circulating within walking distance of clients’ farms or small businesses, entrepreneurs do not have to miss out on business to trek to the bank. OI is developing these portable bank branches in locations around the world. OI also offers electronic wallets that allow customers to make deposits on mobile phones. With this cashless solution, the bank reduces both the risk of client theft/robbery and also the likelihood of staff fraud. OI’s electric wallets are currently in use in Malawi and seven other African countries.

Portable Credit. The Entrepreneurial Finance Lab (EFL) is helping banks, MFIs, and other partners improve operations with portable technology. Not only can loan officers complete credit applications electronically on a mobile phone or tablet, but they can also collect photos and the precise location of their clients with the use of mobile GPS. With near-real-time scoring of the EFL Tool, an application that captures the ability and willingness of customers to repay a loan, banks have the opportunity to pre-approve clients on the spot. The improved efficiency of automated data collection and credit assessment decreases service turnaround time and increases credit access. The EFL Tool has been used in over 20 countries to date and has processed over 50,000 credit applications.

Portable Insurance. The mobile network operator, MTN, has partnered with Hollard Insurance Group to offer Mi-Life, a mobile phone life insurance, which provides entrepreneurs and their families with financial security in the case of death. MTN clients can buy life insurance, pay premiums, and initiate claims using their mobile phones and SMS. By using mobile phone technology that keeps servicing cost low, MTN can offer insurance premiums a low as $0.65 USD/month. If clients have enough money deposited, the entrepreneurs among them can also use their insurance policy as collateral when applying for loans. Mi-Life is available to MTN Mobile Money users throughout Ghana.

Portable Asset Financing. Portable asset financing enables entrepreneurs to invest in costly assets by making small installment payments with a mobile phone. This financial tool opens a large range of opportunities to enable low-income consumers to access utilities and investments. Former head of Vodafone’s Global Payments and M-PESA founder, Nick Hughes, helped develop a company called M-Kopa. M-Kopa enables Kenyans to acquire a device, like a d.light solar home system up front and pay for its use with affordable installments. M-Kopa operates with small computer chips integrated with M-PESA that are inserted into the devices allowing customers to make electronic payments.

Image credit: Entrepreneurial Finance Lab

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