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Emerging Technologies forming new market segments and creating a meaningful change! Why Financial Institutions need to rely on Data Science in emerging markets
This post is written by Anshul Bhardwaj, Research Fellow, January 2021.
Introduction
We are beginning to see how technology creates an impact on every individual’s daily life. With more number of smartphone users, an increased amount of data is also generated. Some reports suggest an average of 40 exabytes of data gets generated by a single smartphone user each month. There are billions of users across the world generating a large amount of data.
We are now living in an era where the term “Big data” has become very relevant. This helps us to handle the above size and amount of data. This scenario creates a revolution that opens doors to different opportunities, forms different market segments for every industry, and each of them in the race to become a part of this data revolution. Whether it is Health Care, FMCG, Automobile, financial services, or any other industry, the businesses use data to derive useful information and insights. This helps them to create better products for their consumers which leads to increasing their efficiency and market share of these businesses. Some of them have become a behemoth in terms of the size and type of diversified information that they hold on their consumers.
After using traditional methods like credit bureaus and having a number of non-performing assets (NPAs) in the Financial Industry, many regions and firms started adopting BDSC in the last decade. This has given them better results & an increase in accuracy to find a credit score while delivering services such as lending. These practices are also increasing their market size while reaching the consumers, who were otherwise invisible to them. Now the underbanked consumers have started becoming visible to financial institutions(FIs) and this is creating new market segments which basically grows the Financial Industry.
However, this growth is determined by more unorganized sectors switching to technology, FIs leaving their traditional methods, more merchants accepting digital payments, and widespread use of smartphones. All such behavior creates a large amount of data through which FIs and other financial firms can increase their reach and accuracy while lending credits which leads to increasing the market size. This change is paramount to the sustainable growth of financial institutions.
Let’s talk about India, a country that is going to have more than 800 million smartphone users in a few years with access to the internet. The best part is the maximum population of these smartphone users will be young, which helps their next generation as well as the previous one to adopt technology at a faster rate. This creates more data as the majority of these users get engaged in social media networking, making phone calls, online shopping, and much more. All this data helps to make better predictive modeling and algorithms to calculate the creditworthiness of an individual, in the context of financial services.
BDSC (Big Data Small Credit) opens new Opportunities for FIs such as Microfinance Institutions
In India’s GDP growth story, more than 50% of the contribution is from the unorganized sector or micro-businesses. But in these unorganized sectors, these micro-businesses are unable to get the benefits of financial services. The reality is such that whenever they require short term credit for their business or for any emergency, then they usually end up borrowing money from informal private lenders. These informal lenders can be either from their friends’ circle or family or local money lenders. Thanks to the rise of & adoption of technology, micro-businesses have started accepting digital payments and beginning to become digitized users. This converts them from invisible consumers to visible and many financial services institutions start reaching out to them. There’s a vast market that is still left untouched, a market that can gain access to MFIs and Formal credit.
The story of big data small credit not only opens doors of opportunities for MFIs but also for Insurance Companies, Investments firms as well as financial management tools. BDSC gives strength to the newly emerging economic markets as more data is generated by the newly digitized users. This will help to increase the accuracy of the credit bureau score of an individual which directly helps consumers to borrow money from formal lenders. This leads to the growth of financial institutions and contributes to the growth of the country’s economy.
Traditional Methods v/s BDSC
In low-income countries, most of the population lives in rural areas or are involved in micro-businesses and non-organized livelihoods. In such economic eco-systems, the use of technology is visibly less or almost zero, amongst these emerging market consumers. It’s very difficult for these consumers to avail services of formal & regulated financial services firms. The primary reason is that with traditional economics of banking, calculating these consumer’s creditworthiness is an expensive affair with no or little data, to begin with. Added to this, there are small monetary transactions involved as most of these consumers take short term credit. It is evidently difficult to bear the cost of traditional systems like the credit bureau to know and assess most of these consumers. It turns out that traditional banking is not appropriate, affordable, and accessible for this underserved market.
Now, the markets are on the verge of change according to a recent report by IAMAI. There are 227 million active users in rural areas (10% more than the urban areas) in India. Most of them have accounts on social media, watching videos online, using services like chatting, online shopping, and also starting to accept digital payments.
The global population is moving towards the digital revolution which is also creating a trend for big data. There are 40 zettabytes or 40 trillion gigabytes of data, generated in 2020 which is 49 times higher than what was generated in 2009. Thich creates new opportunities for several markets to address them and Formal Financial service firms can also increase their market size by providing formal credit service to them with the help of BDSC.
Big Advantage of BDSC: High Accuracy and Risk Management
It’s rather difficult to lend money in an underserved market or in an unorganized sector. The challenges arise due to high delinquency risks. Lack of repayment of loans turns the overall portfolio of loans at risk, in some cases threatening the very existence of the Financial Institutions operating in such sectors.
It’s hard to get to know the creditworthiness of an individual in such sectors and because of this, we are losing a huge size of the market which has a lot of potentials to grow itself and to grow other related sectors. It has become quite evident that the traditional methods were not efficient enough to calculate the accuracy of an individual’s credit score. A high street bank lending short term credits in these sectors come with a high cost of bearing these transactions.
However, by using big data analytics, the cost per transaction can be reduced to a very low fraction of what is prevalent in the industry. With big data analytics, accuracy can be maintained at a very high standard while estimating the creditworthiness of consumers. It’s becoming increasingly easier to reach the underbanked consumers with the help of smartphone technologies. Added to this, the data generated by them like phone calls, social media patterns, bill payments, and digital transactions helps to know their buying behavior and their consumption. Predictive analytics and algorithms are increasingly making it easier to know their creditworthiness which indirectly helps them to get included in the financial services industry.
Few examples of financial services such as short-term credit, insurances, savings products which were very difficult before the era of big data are now becoming a steady and possible reality as we enter into 2021.
According to research, practices involving big data in micro-finance can affect more than 1 billion consumers around the globe.
Now, arrives another problem to think about, Who owns all this data?
