Does ‘unbanked’ mean ‘undeserving’?

5 min read

Lenders perceive the need to change

There is no good reason why someone without a bank account should not be able to get a loan. There were always local economies that got along very well without banks. There are many today. And, as the world becomes a global village, the digital technology that permits us to converse face-to-face across continents and team up for video games across oceans, will enable us to lend money across cultures and languages. And, in this global village, these personal loans can be extended with the same confidence in each other’s reputations as if we were all in the same provincial village of a thousand souls.

 

New technology

Unfortunate as it might be, blockchain technology is – temporarily we believe – out of fashion. The phenomenon of 2017 has become mundane in the public eye. The cryptocurrency run is over, and many of the initial coin offerings have proven unsustainable.But none of that was ever what blockchain was supposed to be about. This new technology provides enterprises with a distributed ledger that cannot be corrupted. The treasurer needs to keep only one set of books. That ledger and the reports it generates are updated in real time, so there’s no need for monthly, quarterly, semi-annual and annual closes. And because there can be no disputes about the accuracy of the financial data, the need for third parties to get involved in transactions is sharply reduced.With all that friction taken out of the financial process, the expense of making a loan is reduced. With clearinghouses and correspondent banks are out of the picture, the interest rate need not be so artificially high. And, for much the same reason, it is now financially viable to make micro-loans to individual entrepreneurs whose need for funding is the most urgent.

New lenders, old lenders

It is often said that Walmart should have invented Amazon, Hertz should have invented Uber and Tower Records should have invented iTunes. But that’s not what happened. In each of these cases and more, the big, legacy-technology company ceded the first-mover advantage to a startup.

So when major players as well as startups jockey for position in a new field, it would appear that the market opportunities are real. According to the Russian blockchain community DeCenter, blockchain-enabled lending has attracted quite a crowd. They range from SALT, an old-school peer-to-peer lender that collateralized crypto-assets for fiat-currency loans, to ETHlend, a blockchain-native P2P lending distributed application (DApp), to BitBond, which uses the Bitcoin blockchain to match lenders to borrowers for comparably low-interest rates using alternative credit scoring, to Credit Suisse.

Credit Suisse? BitBond was looking like the oldster of the bunch, having formed in 2013. So what is a 162-year-old, bulge-bracket bank doing in the blockchain space? It’s launching a platform for syndicated lending, taking advantage of R3 Corda technology to speed up transactions and take out enough cost to make individual loans attractive. Syndicated lending, though, implies that there are other banks involved, and such is the case. Credit Suisse leads a group of other major institutions in this project. It might not be long before a consortium of Credit Suisse, Barclays, and Royal Bank of Scotland participate in your car loan.

The implication is that, because of blockchain adoption, there might soon be no need to bundle loans together for securitization. It could become more efficient for banks to spread the risk and share the reward of each individual loan. That would render obsolete such asset classes as collateralized mortgage obligations – the derivatives that triggered the financial crisis of 2008.

 

New scoring

It’s not just large financial institutions that are seriously examining how to serve the unbanked. Many leading strategy consultants are pursuing this same line of inquiry.

“Today there are more than 2.5 billion people without access to formal financial services, and there are hundreds of millions of micro, small, and midsize enterprises with unmet fin

ancing needs,” according to McKinsey & Co. “[N]ew alternative data models have cut credit losses in experimental forays into lower-income segments by 20 to 50 percent and doubled their application approval rates.”

If this sounds like forward thinking now in 2018, then it bears mentioning that this McKinsey article is five years old. Since at least 2013, there has been increasing disenchantment with the time-honored FICO scores.

FICO does have the advantage of simple elegance: it’s mostly a factor of a consumer’s payment history and the amount owed. And as long as you have a long history of paying all your bills on time, you’ll score high.

Where it all falls down, though, is that it looks backward, not forward. Credit history is one way of predicting whether or not a debtor will pay back a specific creditor in full and on time, but not the only way. It might not even be the most reliable way.

If you rent your home, don’t drive and prefer not to use credit cards, then you could be saddled with a subprime score despite there being no evidence that you are irresponsible or pose any risk of nonpayment.

Or worse, you could have no score at all. The U.S. government estimates that, in the world’s largest economy, 26 million adults have no credit history. And if 8% of the voting-age population of this economic superpower is invisible to lenders, it boggles the mind to consider how strapped for capital the rest of the world is.

With FICO rankings out of reach, credit scoring disruptors have pursued several innovative paths to predicting who makes a good risk. To accomplish this, they have developed metrics with nothing directly to do with credit history. Mobile phone behavior, payments to utilities, social media data and online spending history are just some of the data sources, according to fintech consultancy Medici, used to create next-generation credit scores.

In our white paper, we at Colendi clarify our own proprietary approach. Our algorithm is a balanced scorecard of predictive metrics. We do consider past credit performance, but this is tempered by non-financial inputs. Basing the agile machine learning protocol on the thousands of datasets of an individual for real-time calculations of different score sets and crawl the end results between the Colendi data-nodes through the ethereum blockchain without having to violate any personal information finally yield a self-sovereign Financial Identification and Financial Score, presents the unique opportunity to the Colendi users to utilize their own information for their benefit. Until today, these information have always benefited larger corporations and entities while stripping the real owners the right to use and own. Colendi Project will start a new era where the decent individual will have the right to use and control his own data and will no longer be punished for the financial system that they involuntarily found themselves in.

 

New economy

The reasons to lend to the unbanked are practically endless. When combined with the blockchain technology that enables rapid, efficient, irrevocably documented transfers of values large or small, the reasons why not fade away.

According to the World Bank, 250 million international migrants sent remittances home in 2015. These totaled $432 billion, an average of $200 at a time. The bad news is that middlemen took 7.4% of transfer and conversion fees out of that. The good news is that this figure trended down from 2009’s 9.0% average.

“Nevertheless, average remittance costs remain far above the [sustainable development] targets,” according to a World Bank brief, which expresses the hope for a 3% average while giving its member nations until 2030 to achieve that.

But we could get there overnight on the blockchain. In fact, we could get to 1%.

If money can be sent from wealthy nations to emerging markets for so little, how much more could it cost to extend a loan?

Let’s use that 3% target figure from the World Bank. A fishing family in the Philippines could get the money it needs for new nets and traps. A woman in Mali could acquire and feed livestock. Shopkeepers in conflict zones from Myanmar to Congo could get bridge loans to stay in business until stability returns. And with the microfinance capabilities of blockchain technology, $5,000 or $1,000, or $500 could be extended by an institution or individual in another hemisphere, with confidence that the money was not just well spent – it was well-invested.

 

We will keep on working hard for the Colendi Project and keep you updated. Keep following us!

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