The majority of the developing world population makes little use or no use of financial services. Accenture estimates that only 70 percent of microenterprises in an emerging country like India use bank accounts while only 5 percent use products like term loans, and a paltry 1 percent have working capital loans from banks. In similar emerging markets, lenders find it difficult to make credit decisions due to weak coverage of credit rating agencies. On average, only 10 percent have credit scores.
One company that understands the riches lying at the bottom of the pyramid is Entrepreneurial Finance Lab (EFL GLOBAL). EFL helps lenders capture untapped markets by delivering credit scoring technology tailored for such markets.
How EFL Uses Psychometrics to Determine Credit Risk
EFL Global is a pioneer in psychometric credit scoring and was founded in 2010 by Dr. Bailey Klinger and Dennis (DJ) DiDonna. The company is headquartered in Miraflores, Lima, Peru.
Dr. Klinger is executive chairman. Prior to co-founding EFL, he served as a senior advisor and consultant to various government and multilateral institutions. DiDonna is chief strategy officer. Previously, he worked at MCM Strategic Data and Angie’s List as a technology entrepreneur with a background in sales and operations management.
EFL Global has about 200 full-time employees. With partners in Africa, Latin America, South Asia, and Southeast Asia including 30 retail MFI and SME financial institutions, EFL has raised multiple funding rounds from Google Foundation, Omidyar network, SNV World, and other funders.
Original research for EFL started 10 years ago at Harvard. For the first three years, the company focused on research and individual testing rather than commercial application. This innovative financial technology company promotes small business growth in developing countries by allowing lenders to determine the credit-worthiness of “data-light” businesses and consumers through its proprietary credit scoring technology, which leverages psychometric databases and non-traditional applicant data. Helping lenders assess borrowers by evaluating loan applications on a granular level, they ask questions regarding behavior and demographics.
This in-depth and insightful evaluation helps lenders understand an individual’s trustworthiness, ability to manage money, and willingness to repay loans. EFL Global has scored almost 900,000 customers to date and helped originate over $1.3 billion in credit. Working in 15 countries, they’ve helped all kinds of lenders including trade banks, retailers who provide loans to individuals, lenders who give microfinance loans, and lenders involved in peer to peer lending.Lenders use EFL’s score which helps in measuring applicant’s probability of default. On the basis of risk predicted, lenders adjust acceptance rates and differentiate between worthy and unworthy borrowers. The reason it has been successful is because EFL believes in constantly evolving and updating their scorecards and databases so they can better serve customers better.
The statistical model that Entrepreneurial Finance Lab uses also depends on customer feedback. Lenders use EFL’s score for analyzing creditworthiness while furnishing loan performance data back to them. This performance is checked on a monthly basis, which helps the company evaluate who is paying and who is not.
EFL’s Performance in Psychometrics
EFL has managed to help lenders reduce their default rates by 50 percent. Alternatively, it has increased acceptance rates by over 100 percent with the same default rates.
Considering that an online lender needs to spend hard marketing dollars to generate leads, every reject is a massive cost to the company. This ensures that the lender is not throwing away good leads because of lack of “proper data.” The company has worked across the spectrum, with markets like India seeing a default rate of 1–3 percent and Mexico operating more on a payday scale with higher accepted default rates. Therefore, psychometric credit scores help lenders reach the right borrowers without any additional marketing costs.
The company also prioritizes banks and brick-and-mortar lenders looking to shift online. These companies have the requisite demand and supply infrastructure. What they lack is an online platform that holds their hand as they tiptoe into the digital future. EFL helps lenders in this transition by integrating these scores with existing lender IT infrastructure.
EFL also uses online and tablet platforms for innovative data sources such as mobile phone usage data (via CDR), social network data (via Facebook and Twitter), and location data (via GPS and GIS). Their revenues from digital channels have increased every year. For instance, Entrepreneurial Finance Lab has piloted with a few online lenders across Mexico, India, and Indonesia, and they are looking to continue to grow in these markets.
EFL’s credit score is also available to FICO clients. Moreover, it is looking into providing its own capital for underwriting EFL-approved loans to improve credit quality and increase approval rates. Their goal is to create social impact as they compete commercially.
Industry players include Lenddo (also part of the Omidyar Network), which provides a similar line of products. But the online lending space is increasingly experiencing credit quality issues.
Another thing impacting competition is that many physical lenders are moving to pure digital channels. EFL founders believe there is a massive gap in the market and multiple players can operate offering substitute and complementary products. More importantly, it is not a winner-take-all market. With a focus on the developing world and bringing traditional lenders onto an online model, Entrepreneurial Finance Lab have a substantial lead in a niche (psychometrics) they can dominate for the foreseeable future.