Keeping score

The ability to obtain credit is one of the most empowering capabilities of the financially included. But those who don't earn enough, often enough find it almost impossible to get the banks to notice them. If the banks want to include this low end of the market, they need to be willing to make the effort and embrace the risk - and technology can help.

It's an unfortunate Catch-22 in the financial services industry that people can't get credit until they've had credit. As anyone who has ever applied for a loan - or even a bank account or a cellphone contract - can attest to, a spotless credit record is a vital component of their application. But for individuals who are informally employed, who don't have a bank account and who have never had credit before, it's virtually impossible to gain that first foothold on the financial inclusion ladder.

Credit is simply a way of extending buying power. Those not able to obtain credit are constantly playing catch-up, as they are unlikely to put away small savings each month until they amount to anything meaningful. Credit makes it possible for these people at the bottom of the financial pyramid to become empowered purchasers and users of services like cellphone connectivity.

The problem is that when confronted with the requirements of opening a line of credit, they will always come up short. Some banks even require a proof of residence and three months' pay slips for as simple a financial function as opening a savings account. For the mass of South Africans working as domestic workers, gardeners or manual labourers for multiple employers, there is almost no hope of producing the necessary documents to acquire credit.

And yet, many of these individuals have begun to interact with the world of financial services in small but significant ways. They might use FNB's eWallet to have their monthly salaries sent to their cellphones, or they might have an MTN Mobile Money account, which acts as a bank account with a debit card, without having a connection to the banking infrastructure. These two entry-level financial mechanisms, if used correctly, could help banks to establish credit records for entry-level customers.

If the agreements were in place, an eWallet or Mobile Money user could walk into a bank and provide some kind of acceptable identification - passport or ID - that allows the bank to verify who they are. As part of this registration process, they would then link their identity to the cellphone number they use for financial transactions. Remember that at this stage, they're not applying for any kind of credit; they're just giving the bank the opportunity to monitor their transactions.

If, then, over three months or so, they are able to show they consistently earn, for instance, R1 000 per week, they'll have established a provable income that the bank can then use to take the next steps with them. Those steps might be a savings account, or they could take the form of a small loan, repayable over the course of a year. In bite-size nibbles, the banking customer would have the opportunity to start eating at the financial inclusion table. And, as I mentioned at the outset of this Industry Insight, once a customer has started to get credit, it becomes much easier to get more credit.

While financial inclusion is good for the included, the broadened customer base is also very good for the banks. But to access this new market, they are going to have to become a bit more proactive. Building the technology would have to be the first step - an application programming interface would have to be created, linking the bank's systems to the eWallet or Mobile Money provider. Then the banks would have to evolve their credit scoring algorithm to include this new data set.

In bite-size nibbles, the banking customer would have the opportunity to start eating at the financial inclusion table.

Banks are traditionally risk averse, and especially in these turbulent financial times, they're wary of taking on credit. However, they will not be able to access this low-income, informal market of customers by waiting for them to fit into the credit scoring system. Instead, they have to find ways to work with entry-level banking customers in a way that welcomes them into the financial inclusion fold. It's not impossible; it just requires innovative, progressive thinking.

The banks need to put the effort and risk into developing a similar model for scoring entry-level customers in their industry, with the end result that significant benefits can be realised for them and their customers. The technology exists; they merely have to get it talking, and then listen to what it tells them. Then they will have a model for successfully engaging with the bottom level of the pyramid.