Lending Startups Use Borrowers’ Smartphone Behavior To Decide If They Are Creditworthy

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Branch is just one startup offering loans to consumers in emerging economies after determining borrowers’ creditworthiness though their smartphone behavior.

The wallet-sized – or larger – smartphone constantly tethered to your hand may often be seen as your connection to the outside world. Each time you surf the web, connect with friends, make purchases and check your bank account, it’s collecting mountains of data about you. And that data could soon be analyzed to determine if you’re creditworthy. 

Or at least that’s the idea behind a number of lending startups trying to revamp the way consumers in developing countries obtain needed lines of credit, despite having no actual credit history, the Wall Street Journal reports.

The companies say that by glancing at a person’s cellphone they can access data generated by apps and uncover behavior that correlates with the likelihood that a borrower will repay or default on a loan.

To access a potential borrower’s phone, the companies have created a slew of apps, which analyze information stored on the device, including the content of their text messages, emails and duration or frequency of calls.

That means the decision on whether or not someone qualifies for credit could hinge on how often they charge their phone or whether or not they add a last name to stored contacts.

Branch.co already has such a program up and running in Kenya, where an Android app lets users apply for small loans, get approved and obtain access to the funds in minutes.

The loans, which average just $30, come with a 6% to 12% interest rate depending on a borrower’s creditworthiness as determined by their smartphone behavior and are expected to be repaid within three to six months.

“These are people that don’t have a credit score,” Branch founder Matt Flannery said. “Your digital trail can establish your financial track record.”

Each startup, and its corresponding app, has a different method for culling and analyzing the smartphone data.

For example, a company called InVenture, which also operates in Kenya, found that users who wait until after 10 p.m. to make calls are often lower-risk borrowers.

“You’re able to get in and really understand the daily life of these customers,” InVenture CEO Shivani Siroya tells the WSJ, noting that the company’s algorithm analyzes 10,000 so-called signals per customer in order to determine creditworthiness.

In another example of data analysis, Branch found users who are known gamblers – a detail found by scanning messages or payment logs – are more likely to repay a loan than non-gamblers.

Customers of the apps in Kenya tell the WSJ they chose to borrow through the startups to pay for running or improving their small businesses because banks were too far away or imposed higher interest rates.

The owner of a health and beauty store used the funds for items like skin cleansers when her account was running low, while a chef used the credit line to purchase plates, cutlery and pots.

The WSJ estimates that lending startups like Branch and InVenture could bring needed lines of credit to up to 580 million people living in emerging economies.

Of course, with the amount of sometimes sensitive data being collected by these startups and other companies, privacy is a big concern for both consumers and privacy advocates, who warn that some data could be misconstrued by the algorithms.

For example, advocates shared concerns with the WSJ that someone may be denied a loan because they simply Tweeted “my car has broken down.”

Still, a survey of dozens of people in developing countries found that most had no problem sharing personal information in exchange for lines of credit.

While these companies are focused on emerging markets markets outside of the U.S., other so-called smartphone lenders like LendUp and ZestFinance use similar algorithms and process to provide credit to American consumers.

Making the decision to lend based on non-traditional data sources isn’t just contained to startups: the WSJ reports that companies like Visa have built mobile payment apps.

In August, social media behemoth Facebook received a patent that would allow lenders to determine a borrower’s creditworthiness by looking at their “friends.” It’s unclear if that project will ever come to fruition.

Lending Startups Look at Borrowers’ Phone Usage to Assess Creditworthiness [The Wall Street Journal]