What is Credit Data and why is it so difficult to obtain?
We have become used to finding all sorts of information quickly and practically costlessly using the internet and the magic of modern search engines. At least for those of us living in developed countries.
Not so much in emerging markets, where programmes by companies and governments to digitize information are not widespread. This makes data costly to find and obtain.
While true for all data, it is credit data that proves most expensive. It is needed to open doors to finance, trade and partnerships and without it businesses struggle to grow and even sometimes survive. It is the lifeblood of the economy.
‘Credit Data’ really comprises two parts which are both necessary and complimentary:
- Know Your Customer (KYC) Information which gives assurance that a business says they are who they say they are, and
- Financial Information which gives an indication whether a business has the cash flow to be able to repay a loan and its interest
But obtaining credit data can be both tedious and costly for both lender and borrower.
Borrowers have to complete endless forms, usually on paper, and provide 3rd party evidence such as bank statements and copies of IDs. Likewise, lenders have to do manual risk assessments which take time and often require multiple requests for information. It is an arduous process for everyone and often borrowers give up after months of trying.
The demand for finance is there, and the capital markets are deep so demand and supply should match. But only if trustworthy information can be shared easily and cost effectively.
Just how big is the credit data problem?
In Asia, while the number of micro-enterprises outnumber SMEs, the funding shortfall is greatest amongst SMEs. In fact, it accounts for more than half the total of the total gap.
The chart below illustrates the funding gap problem, separated by region.
What is creating the credit gap? Here are the 7 most common reasons.
- Lack of Trustworthy Data
Absence of consolidated verifiable financial information on which to evaluate creditworthiness, especially Know Your Customer (KYC) and cash flow data.
- Lack of Collateral
World Bank Enterprise Survey’s data shows that 79% of loans or lines of credit require collateral, which is particularly difficult for SMEs in emerging markets.
- High Transaction Costs
Small value loans are not profitable enough for banks to justify risk assessments and due diligence on even relatively low risk investments: the smaller the loan, the higher the relative transaction cost.
- Inefficient Loan Application Workflows
Loan applications within financial institutions’ workflows are usually completed on paper. This means they are subject to completion and capture errors, as well as information duplication, all adding to the time and cost for all parties.
- Lack of Electronic Payment Acceptance
Electronic payments are strongly relevant to transactional data, but most emerging market SMEs are still unable to afford POS terminals to enable these payments. POS terminals exceed 15 per 1,000 inhabitants in developed markets compared to only 6 per 1,000 in emerging markets.
- Data Islands
Financial institution databases are disparate and there is no incentive for institutions to share data. Credit Bureaus with rich databases are common in developed markets, but do not exist in emerging markets to the same extent, thereby increasing the cost of loan assessments to the underwriters.
- Lack of a Market
Loans in this market as with many other markets are over-the-counter and negotiated one-on-one. This increases the costs for both lenders and borrowers as they struggle to find one another at low cost. In particular, SME owners are not aware of new alternative lending channels increasingly available to them.
Credible: Our solution to closing the funding gap
That’s one of the reasons we’ve developed SmartPesa Credible, a new blockchain solution that addresses the funding gap by providing secure credit scoring data for SMEs in emerging markets.
It does so by incentivizing the provision and use of credit data, benefitting both borrower and lender. A unique token system allows a merchant’s credit data to be accessed by third-party users with their permission, and upon providing the service, payment is rendered in tokens.
Credible is the only global distributed ledger to store identity, financial and transactional data on the blockchain and to provide comprehensive credit scoring for lending activities.
The new blockchain platform will use a combination of technologies: Artificial Intelligence, algorithm-driven credit scoring, big data analytics, graphing, transaction and loan analytics and Banking APIs.
Here is how Credible directly seeks to address the seven problems identified:
(1) Lack of Trustworthy Data: Credible is a method to capture, store and access data that is digitally signed and trusted by third parties.
(2) Lack of Collateral: Credible will provide facilities for merchants to pledge assets, including Tokens in escrow against the performance of loans.
(3) High Transaction Costs: Credible allows lenders to reduce due diligence rework.
(4) Inefficient Loan Application Workflows: Credible provides readily available digital data.
(5) Lack of Electronic Payment Acceptance: SmartPesa provides full POS terminals for fiat and crypto payment acceptance via credit/debit card, QR code and contactless.
(6) Data Islands: One single blockchain where financial institutions, businesses and users are invited to contribute, verify and consume data. Confidentiality is maintained through encryption of data which allows only one global database to be used.
(7) Lack of a Market: Credible includes credit scoring as well as providing potential lenders the tools to do online credit assessment. The same system is then used as a lending marketplace for borrowers and lenders to advertise, find, negotiate and complete loans. The system is open to traditional financiers as well as new systems such as peer-to-peer lending and alternative lending entities.
Read our White Paper to get a complete picture of how Credible’s solution is ideal for both emerging and developed markets.
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