Banks consider many factors when they process loan requests, but soon they may incorporate one more data point: your smartphone use.
Brown University economist Daniel Björkegren and the Entrepreneurial, Finance Lab, which produces credit scores, are developing an algorithm that can assess a person’s reliability based on the way he or she uses a smartphone. Such an assessment could let banks make smart loans to borrowers who don’t have a sizable credit history.
The absence of a credit history is a particularly large hurdle in developing countries. Banks don’t usually give loans to people who can’t present evidence of years of sound financial decision-making. As more and more people in developing nations gain access to bank accounts—62 percent of adults in the world had an account in 2014, up from 51 percent in 2011—the importance of securing access to loans has only increased.
Björkegren determined that, by using his algorithm, which looks at things like how quickly people returned missed calls and used mobile apps to pay bills, banks could have eliminated 43 percent of their loan defaults.
“Indicators of behavior derived from mobile phone transaction records are predictive of loan repayment,” Björkegren says in his report, which he presented at NetMob 2015 in early April.
“There are many behaviors that may predict entrepreneurial success that can be revealed in phone usage,” the report concluded, “including patience, whether relationships are reciprocal, and the strength and expanse of an individual’s social network.”
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