Getting a bank loan without any financial history is a problem. This is a sobering reality faced by millions of people around the world. Especially, for recent graduates and people living in developing countries.
While many people consider having zero debt a good thing, most banks don’t. Banks aren’t comfortable lending out money to people who have no financial history. Then, how can you get a loan if you don’t have a bank account or a credit card?
Do you have a cell phone and social media accounts?
According to research, a person’s cell phone data and online activity can accurately determine if they will pay back a loan.
In 2013, Daniel Björkegrena, an economist at Brown University, published the report, Behavior Revealed in Mobile Phone Usage Predicts Loan Repayment. He examined phone records of 3,000 people whom borrowed from a bank in Haiti. He looked for behaviors like, what time of day they made phone calls, who they called and for how long.
A responsible borrower may keep their phone topped up to a minimum threshold so they have credit in case of emergency, whereas one prone to default may allow it to run out and depend on others to call them,” says Bjorkegrena.
After applying the process he found the bank could’ve reduced defaults by 43 percent if it had used his algorithm to pick applicants.
He also found that examining a borrower’s returned calls gave him useful information.
An individual whose calls to others are returned may have stronger social connections that allow them to better follow through on entrepreneurial opportunities,Daniel Björkegrena.
Are There Risks?
Yes. As you might suspect, this algorithm carries some identity risks. Signing over such a large amount of data and personal information can’t be totally safe. But, many startups that made the switch to the new algorithm claim to prevent fraud and identity theft.
A Company Doing It Right
Lenddo, a financial technology company, is very successful using a similar algorithm in the Philippines, Columbia, and Mexico. They use a borrower’s social networks like, Facebook, Linkedin, Google, Yahoo and Twitter to prove their identity and creditworthiness.