The Role of Technology in Reducing Barriers to Credit

In the developed world, accessing credit through banks is the most common method of obtaining financing. Taking out credit cards and mortgages, and applying for loans through these established and regulated institutions allow us the means to enhance our livelihoods by purchasing goods and services we deem contributory to our health, safety and well-being. Most of us meet the requisite criteria set by banks to qualify for financial products (e.g loans, insurance etc.) through the offer of collateral, credit history or salary, allowing them to secure a safety net for themselves during a crisis.

But what about the 2 billion people across the world who do not have access to regulated bank channels? Or those who are considered too high a credit risk because they have no collateral, or are employed within informal sectors with irregular incomes?

In emerging markets, many are excluded from accessing credit through banks. It is particularly a problem in places where swathes of the population live in near poverty, or rural communities with little access to physical bank branches. In Asia’s emerging economies alone, approximately 50% of the total population are unbanked, with 51% of MSMEs in Southeast Asia (39 million enterprises) unserved or underserved by credit services. Moreover, in countries such as Thailand, the unavailability of affordable credit for poor and vulnerable populations has led to a massive loan shark problem. In 2014, it is estimated that the average household took out about 19,000 USD to 48,000 USD worth of illegal loans, as one third of all households (8 million) did not enough money for their living costs. The exorbitant interest rates charged usually trap many in an endless cycle of debt.

Can fintech bridge these financing gaps?

The emergence of smartphones and digital technology has enabled financial technology (fintech) firms to infiltrate the lending market by harnessing four key trends:

1. Fintech companies are now able to process information more quickly and at lower cost. The use of AI and blockchain can unlock alternative data points to determine the creditworthiness of borrowers and automate processes, helping to reduce managerial costs and, most crucially, offer a lower cost of borrowing.
2. Technology platforms allow individuals to collectively fund or donate to causes they find worthy (e.g. helping someone to pay off their student loans through GoFundMe), both contributing to the financing needs of a particular company or individual, as well as generating returns through marketplace lending or peer-to-peer lending.
3. Fintech platforms are also able to crowd in debt capital from private investors from all over the world to increase the pool, thereby lowering the cost of lending available to these segments of the population.
4. With processes being online and automated, technology offers accessibility, scalability, and transparency, eliminating many of the barriers previously associated with engaging in the private lending market.
5. 1.  

With local market penetration and on-the-ground presence, fintech firms have leveraged the use of smart technology to create avenues for access to quick and affordable financing for those otherwise unable to access credit through traditional channels. Examples include someone with a low or unstable monthly income needing money for hospital bills, or small businesses looking to expand.

Even the big guys want a piece of the market

Large companies with established technology platforms like Alibaba, Apple, Baidu or eBay, have expanded exponentially in the past few decades, outgrowing some of the biggest financial institutions. Microsoft and Amazon, for example, have larger balance sheets than JP Morgan Chase or ICBC. With the advantage of a large and established customer base, brand reputation, customer data and cutting-edge technology at their disposal, they have the means to collect vast amounts of data from e-commerce platforms and social networks to compensate for the lack of conventional datapoints, thereby expanding quickly into the financial sector and tapping into an under-served market – the unbanked population. The growth in the alternative lending market has led to many firms pivoting their business focus to this sector, particularly in Southeast Asia, East Asia and Latin America.

To provide an example, in China, Alipay (from Alibaba) and WeChat now act as payment platforms even though financial payments did not factor into their original business models.

What is the future for fintech lending?

Nonetheless, fintech lending is still a relatively unmapped and fragmented market across geographies, remaining a largely unknown territory. With careful due diligence, market consolidation, and a complimentary segregation of duties among traditional lending institutions, however, BigTech and SmallTech lenders and fintech lending platforms have the potential to empower low-income populations and MSMEs through access to credit.

How can we, as investors, catalyse this market into a yield enhancing investment opportunity whilst driving capital to eliminate poverty?

Tackling the world’s most pressing issues no longer sits solely on the shoulders of philanthropy, but forms a critical investment decision. The field of impact investment, where investments are driven not only by financial returns but also bring about positive impacts on the world, is being catapulted into the mainstream by the growing social and environmental consciousness in our society.

At GreenArc Capital, we believe alleviating poverty is no longer a “nice to have”, but a moral and social imperative. Be it farmers in rural Indonesia or women factory workers in Thailand, we all need to strive for greater financial inclusion to ensure greater opportunities for current and future generations. The onus is on private investors and institutions to drive the force of investing for good and unlock the vast capital required to create long-lasting social change. Whether you are an investor or a partner, we invite you to get in touch to explore how the use of technology can drive impact at scale.