Where is lending leading?

Is privacy the new price of lending? Banks in India are using complex data mining tools to evaluate millions of potential clients and algorithms used in the mass financial markets of Sri Lanka’s neighbor could well end up changing the face of global retail banking.  

Indian banks have started mining data on customers’ smartphones for fast loan approval, testing out cutting-edge but controversial technology in what is potentially a huge market for such products, reported The Wall Street Journal recently. 

The article went on to detail how banks, long hampered from lending to hundreds of millions of Indians without credit histories, are hoping to slash risk-assessment costs and trigger a new wave of consumer lending with apps that look at everything from Facebook connections to online shopping habits to rate potential borrowers.

India’s most sophisticated banks are working with local and international fintech startups to develop, test and launch a version of a technology used by microlenders in Africa, China and elsewhere. In the US, credit agencies have been cautious in digging deep into customers’ phones due to regulatory hurdles and consumer concerns but in South Asia where such legislation is minimal or even non-existent the rewards are much higher. 

Developed countries have less of a need because of a robust nationwide database of information on borrowers. In India, banks say they are cautiously moving ahead as they await regulatory guidance on privacy and develop systems to get permission from applicants for access to their phones.

Mainstream Indian banks using the methods on a large scale could bring the technology to millions of people who were too expensive to lend to before. Until now, primarily financial startups and microlenders have dabbled in phone probing methods.

To work with such consumers, Indian lenders, much like their Sri Lankan counterparts, have traditionally visited borrowers’ homes to see where they live, talk to their families and neighbors and inspect documents. This process is costly for small loans and in Sri Lanka spawned questionable practices that have led to high levels of indebtedness, particularly in the Northern and Eastern provinces. New tech aims to make the process safer for banks.   

Working together with fintech companies, many private Indian banks, including Kotak Mahindra Bank and HDFC, according to the report are exploring how the phone-scanning fintech apps can reduce risk assessment costs. Startups are helping banks track online purchases, SMS messages, crosscheck claims using Facebook and even evaluate the data connection on mobiles to decide how well-heeled their prospective client might be. The potential for such technology is impressive but the scope for its abuse is also staggering. 

This is just one example of how fintech is changing the banking landscape, forcing companies and Governments to adapt. With the advent of electronic identity cards, Sri Lanka is already wading into the murky waters of privacy protection and even though the Credit Information Bureau (CRIB) reduces the need for mobile data mining, the accuracy of fintech makes it a very attractive tool. As technology evolves the line between what is private and what is not will begin to blur and it is important that policymakers get ahead of this wave to make sure that it brings only the good with it.