Putting the S in ESG | Credit where it’s due

Access to credit is access to opportunity. For too long there has been a lack of access to both for millions of people. The traditional bureau credit score is based on limited data. The system advantages certain people, in turn discriminates against many others. The credit playing field is far from level today. It entrenches financial inequalities in the system.

For banks and financial institutions to succeed when it comes to ESG, there needs to be a bigger focus on the social aspect. Catering to a diverse customer base means the need to review credit inclusion. The traditional approach to offering credit leaves millions of people outside of a system. 

An outdated system that excludes millions

Legacy methods of assessing borrowers leads to millions of people being denied access to credit through no fault of their own. There are some 5.2 million people who are unable to access credit just because they have a thin credit file. These people haven’t defaulted on loans or shown that they are a risk. Quite the opposite – they have not been given the opportunity to demonstrate their creditworthiness in the first place.  

For banks and financial institutions to show that they take the S aspect of ESG seriously, rather than relying upon outdated credit scores that penalise millions of people, the world of credit needs to become more inclusive. 

An alternative approach to financial inclusion

The impact of excluding people from credit is significant. It drives people to seek unsafe alternatives, creating a vicious cycle of debt which leads to people being less and less likely to access mainstream credit facilities.  

ALTERNATIVE DATA  

For banks to offer true financial inclusion they need to consider alternative data when assessing credit applications. This can be achieved by incorporating alternative data such as device data, psychometric assessment,  Open Banking or mobile money data.  

A lack of credit history isn’t a sign of a potential borrower being irresponsible with money. It simply means that they have not accessed formal credit recently in that country. Alternative data can allow them to demonstrate their creditworthiness.  

CHARACTER-BASED CREDIT SCORES  

For credit inclusion to become a reality, what should be considered is something that we all have – a personality! Lacking a substantial credit history should no longer be a sticking point when there is the ability to look at character-based credit scores. 

This sees potential borrowers accessing psychometric assessments or consenting to share device data. These data sources allow a profile to be built that show someone’s willingness to repay, their personality traits, their cognitive abilities, and their attitude to risk.  

Strides towards financial inclusion

Credit inclusion is an ongoing challenge around the world. There is a need to make informed, and safe, lending decisions but when it comes to social responsibility there is a need to be more inclusive. Outdated assessment methods deprive people of the opportunities that are open to others.  

By using alternative data and character-based credit scores as an assessment the world of credit is opened up. Those who have previously been locked out of obtaining credit are given the opportunity to do just that. These alternative methods are an important step towards credit inclusion and a huge stride towards banks and other financial institutions taking the S is ESG seriously.  

Alternative data allows lenders to look at people as a whole rather than just a number. This leads to a more rounded lending decision being made and allows someone access to credit for the first time.