Developing Credit Scores for Digital Banks – Journal


The State Bank of Pakistan (SBP) has received an overwhelming response to its new initiative to create digital banks. But the concern is that these banks are failing to achieve their primary objective of reaching and serving the unbanked and underserved population without consolidated and reliable data on their spending behavior and payment history available from the bureaus of private credit to develop an alternative credit score from the payment history of borrowers from the uncooked segments of society for common services such as cell phone bills, utilities, etc.

The central bank received 20 applications for digital banking licenses from domestic commercial banks, microfinance banks, electronic money institutions (EMIs) and fintech players. “Foreign players already operating in the overseas digital banking space have also expressed interest in venturing into the Pakistani market,” the State Bank of Pakistan said in a statement at the end of the receipt process. applications at the end of last month or just three months after the launch of its “Digital Banking Licensing and Regulatory Framework”.

The framework primarily aims to provide financial services, from account opening to deposit and lending through digital means, to the unserved and underserved segments of society at an affordable cost and encourages the application of financial technology and innovation in the banking sector. In the pilot phase, the central bank intends to issue only five licenses for digital banks, which are defined as banks that offer all kinds of financial products and services primarily through digital platforms or electronic channels instead of branches. physical.

The experience of digital banking in countries like China, Malaysia, and Singapore shows their ability to reach targeted populations – low-income people, smallholders, micro and small businesses, etc. – more efficiently than conventional banks. This is important for Pakistani consumers; for example, financing for agricultural enterprises and small and medium-sized enterprises represents barely 10-12% of loans to the private sector because conventional banks have neither expertise nor appetite for these “risky” loans.

The central bank and the government must think of ways to convince telecom operators, electric and gas utilities and others to provide offices with customer data in bulk and on a regular monthly basis.

However, many believe that the usefulness of digital banks will be limited unless private credit bureaus are strengthened to develop alternative credit scoring from the payment history of borrowers from unbanked segments of society for these common services.

“These banks have to lend from their inception to survive because deposits will be slow to come,” said the chief financial and digital officer (CFDO) of one bank, on condition of anonymity. “Because these loans to unbanked individuals, small businesses and smallholder farmers are risky, the interest rate will initially be high.”

According to him, the only way to mitigate the default risk of digital banks is to develop an alternative credit assessment of their potential borrowers based on data on their use of services such as landlines and mobiles, electricity bills and gas, e-commerce and other payments from such sources.

However, telecommunications companies, as well as electricity distribution companies and gas utilities, are reluctant to share their data with private credit bureaus.

“Commercial banks and banks and microfinance institutions have now started sharing data on their borrowers. But utility companies and telecommunications companies do not share their customer data with us. Additionally, we do not have access to individuals’ tax data, which may also be used to develop alternative credit scores. Whenever we contact utilities and telecommunications, they tell us that they are willing to share data about their individual customers at our request, but that they would not provide it en masse or on a regular basis. Such data available to credit bureaus in silos is useless because it does not help us develop scoring models,” a private credit bureau official told this correspondent.

He opined that if digital banks were to accelerate their lending, which they must do to achieve the goal of financial inclusion for low-income people, small businesses and farmers, they will need credit scores. reliable and alternative sources of their potential borrowers. .

Unbanked customers are difficult to lend to but not impossible even if alternative credit scores are not available. “There are other tools available to digital banks to verify the spending behavior and payment history of these customers. But the problem is that these tools are expensive and would force digital banks to charge very high interest rates. This defeats the very purpose of digital banks: to provide financial services to the unbanked and underserved segments of the population at affordable prices.

“Therefore, the central bank and government need to think about ways to convince telecom operators, electric and gas utilities and others to provide offices with customer data in bulk and on a regular monthly basis. , as do commercial banks and banks and microfinance institutions,” the executive pointed out.

The main advantage of digital branchless banks over commercial banks must be their ability to keep their costs within 10-15% of the expenses of their conventional rivals and to keep the loan time as short as a few days. These benefits will not be available to these banks unless they have access to reliable credit reporting models describing the spending and payment behaviors of their customers in a consolidated form in one place.

Posted in Dawn, The Business and Finance Weekly, April 18, 2022

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