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This article was written by Frederik Bussler, consultant and analyst.
About one in four American adults are underbanked, which means they are underserved by mainstream finance and depend on high-fee alternative financial systems. For underbanked Americans, getting a loan or credit card can be difficult or nearly impossible. For those with a credit score, it is often not very high. As a result, these Americans are turning to money orders, payday lenders, and check cashing services.
Underbanked Americans are much less able to “grow” financially, which further perpetuates the cycle of poverty. To break this cycle, we must find a way to provide Americans in this position with equitable access to traditional financial services. Without it, everything from paying bills and depositing checks to starting a business or renting an apartment is more difficult.
Traditional credit scores are outmoded and often irrelevant in today’s economy. They do not take into account data such as employment history and financial behavior, which are important factors in predicting credit risk. This is where artificial intelligence (AI) comes in and how AI could make your credit score stale.
AI enables better credit systems and early access to wages
AI can help lenders more accurately assess a borrower’s risk. It can do this by analyzing data that is not included in a traditional credit score, for example whether the borrower is spending their capital on basic necessities or luxuries. AI could also help lenders identify potential risk factors that may not be obvious, such as if a borrower is using too much of their available credit.
This means that in the future, AI could completely replace traditional credit scores. This would allow more Americans, including those who are unbanked, to access traditional financial services. In addition, it would help reduce the risk of lenders defaulting, leading to lower interest rates and fees.
For example, in the United States, the FinTech startup B9 raised $ 5 million to allow early access to market wages. This service allows employees to receive their full salary 15 days earlier, without having to pay fees. To do this, the company uses AI to predict a borrower’s risk level, powered by data such as paychecks, work history, age, and financial behavior of the user. In this way, by providing information on their financial behavior, clients avoid the high interest rates charged by payday lenders.
The traditional credit scoring model is a global problem. In Africa, for example, about 57% of the population is “invisible credit” – meaning they have no bank account or credit score. As a result, these people find it difficult to get approval for a loan or credit card. This is where AI comes in again. AI-powered credit tools like Weza and CredoLab leverage alternative data such as phone metadata to ensure that anyone can access financial services.
Empower underserved people
These AI-powered solutions empower underserved people by giving them access to traditional financial services. This, in turn, helps break the cycle of poverty and improve their ability to grow financially.
In fact, an analysis found that access to traditional financial services increased the presence of businesses in the region. 7.6% while driving higher income levels. This is because traditional financial services allow people to save money, invest in their business, and make purchases that they might not otherwise be able to make.
AI makes it easier for lenders to assess a borrower’s risk, resulting in lower interest rates and fees. This helps to empower underserved people by giving them access to traditional financial services.
Financial inclusion can even increase economic growth. A International Monetary Fund study found that, for a country with a low level of financial inclusion, improving financial inclusion up to the 75th percentile would result in a 2-3% increase in GDP growth. Indeed, when more people have access to traditional financial services, they are able to participate more fully in the economy.
While AI doesn’t replace credit scores overnight, it’s clear that it has the potential to do so in the future. It would be a game-changing development, because it would give up 1.7 billion people access to traditional financial services around the world.
Frederik Bussler is a consultant and analyst, with experience on innovative AI platforms such as Commerce.AI, Obviously.AI and Apteo, as well as investment offices such as Supercap Digital, Maven 11 Capital and Invictus Capital. It has been featured in Forbes, Yahoo, among others, and has presented to audiences such as IBM and Nikkei.
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