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> Posted by Bailey Klinger, Asim Ijaz Khwaja, and DJ DiDonna, Co-Founders and COO, Entrepreneurial Finance Lab

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.

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