Exploring Fintech’s Revolution: Unraveling alternative Data and Machine Learning’s impact on lending, with a spotlight on CedisPay’s journey
Executive Summary:
This article delves into the transformative influence of alternative data and machine learning in fintech lending, focusing on the revolutionary journey of CedisPay. Grounded in a 2019 study by the Philadelphia Federal Reserve Bank, the analysis compares the lending dynamics of LendingClub with traditional banking channels. Key findings underscore the intricate correlations between interest rate spreads, rating grades, and loan performance, showcasing the increasing reliance on alternative data by fintech lenders.
The narrative draws inspiration from LendingClub’s experience, emphasizing the diminishing role of traditional FICO scores. CedisPay aligns itself with this shift, aiming to empower underserved communities in Ghana by utilizing alternative data for innovative credit assessments. The article explores CedisPay’s distinctive approach, strategic goals, and diverse product lineup, including pension-backed loans, payroll deduction loans, and mobile money deduction loans.
In summary, the evidence from the LendingClub Consumer Platform and CedisPay’s plans underscores the pivotal role of alternative data and innovative credit assessments in reshaping the fintech lending landscape. As fintech continues to revolutionize finance, these insights provide valuable considerations for industry players and consumers alike.
Introduction
In the ever-evolving landscape of financial technology, the profound influence of fintech on sculpting the banking and finance sector is not just apparent but unmistakable. One particularly intriguing aspect that has captured widespread attention and prompted numerous inquiries revolves around the adept utilization of alternative data sources by fintech lenders. To dissect this intricate phenomenon, we turn our gaze to a meticulous study conducted in 2019 by the Philadelphia Federal Reserve Bank ( source : https://www.philadelphiafed.org/-/media/frbp/assets/working-papers/2018/wp18-15r.pdf?la=en). This comprehensive investigation meticulously dissects the lending dynamics of LendingClub, a formidable fintech entity, drawing comparisons with traditional banking channels.
Insights Unearthed from the Philadelphia Federal Reserve Bank Study:
- Intricate Correlations:
- The study unveils a robust correlation entwining interest rate spreads, LendingClub rating grades, and loan performance.
- Notably, the correlation between traditional rating grades and FICO scores undergoes a transformative shift, signaling the ascendancy of nontraditional alternative data in the arsenal of fintech lenders.
- Predictive Power of Alternative Data:
- Our exploration reveals that rating grades sculpted from alternative data showcase commendable predictive prowess in anticipating loan performance during the initial two years post-origination.
- This underscores the efficacy of alternative data in unraveling the intricate tapestry of creditworthiness.
- Empowering the Once Subprime:
- Alternative data emerges as the linchpin orchestrating a reclassification ballet for borrowers traditionally confined to the subprime label. Now, they find themselves elevated to “better” loan grades, unlocking the gates to lower-priced credit.
- Navigating Smaller Spreads with Comparable Risk:
- Borrowers navigating the LendingClub landscape encounter smaller spreads compared to their credit card counterparts, despite bearing an equivalent risk of default.
Observations and Their Ripple Effect:
- Challenges Lurking in Traditional Credit Scores:
- Traditional credit scoring systems, heavily anchored in bank-owned products, emerge as costly envoys for individuals grappling with nonexistent or meager credit scores.
- Each borrower is cast under the umbrella of high risk until proven otherwise, imposing hurdles for those diligently building their credit history.
- Innovations in Gauging Creditworthiness:
- Trailblazing financial innovators, exemplified by the likes of CedisPay, are ushering in a new era of creditworthiness assessments. They ingeniously tap into alternative data sources, dissecting non-bank products like telco bills and rent payments to unveil the realm of “invisible prime borrowers.”
Drawing Inspiration from LendingClub’s Odyssey:
The fintech landscape, akin to a phoenix, undergoes a transformative rebirth, with torchbearers like LendingClub illuminating innovative pathways in creditworthiness assessment. Echoing the insights of Jagtiani and Lemieux, alternative data emerges as a protagonist, relegating traditional FICO scores to a less pivotal role.
Shifting Sands of FICO Scores:
- LendingClub’s journey, as illuminated by Jagtiani and Lemieux, traces a decline in the correlation between rating grades and FICO scores over the temporal spectrum. From an 80% correlation in loans originating in 2007, it dwindles to less than 35% for those born in 2015. CedisPay draws inspiration from this narrative, cognizant of the constraints posed by traditional credit scoring models.
Empowering the “Subprime” Realm:
- LendingClub’s triumph in extending loans to “subprime” customers, often branded with a higher risk label, resonates deeply with CedisPay’s mission to democratize financial access. Identifying “invisible prime” borrowers—individuals boasting low FICO scores but deemed creditworthy—LendingClub sets a precedent for CedisPay. The latter aligns itself with this paradigm, aspiring to uplift underserved communities in Ghana.
Navigating Lower Losses and Fair Pricing:
- Authors acknowledge that losses stemming from lending to “invisible prime” borrowers remained below expectations, underscoring the effectiveness of alternative data. CedisPay recognizes the societal potential in this paradigm, envisioning enhanced access to credit at reduced costs for creditworthy individuals navigating challenging credit histories.
Key Tenets of Fintech’s Societal Contribution:
- Widening Access to Credit:
- Fintech, epitomized by LendingClub’s odyssey, acts as a gateway, expanding access to credit for individuals with commendable financial behaviors but marred by poor credit scores or limited credit histories.
- Guardianship of Consumer Information and Privacy:
- Amid the regulatory labyrinth, fintech, including CedisPay, spearheads the safeguarding of consumer information and privacy. Alternative information assumes a pivotal role in crafting a nuanced understanding of borrowers’ credit quality.
- Calibrated Risk Pricing:
- Fintech pioneers, mirroring CedisPay’s commitment, diligently endeavor to “appropriately” risk price loans, ensuring an equitable and inclusive lending landscape.
CedisPay’s Unfolding Fintech Odyssey:
Embarking on a journey reminiscent of LendingClub’s trailblazing efforts, CedisPay envisions a financial revolution in Ghana. By embracing alternative data and reshaping credit assessments, CedisPay aims to foster financial inclusion and offer affordable credit to those traditionally sidelined by conventional banking models.
CedisPay’s Distinctive Approach:
- CedisPay’s mission orbits around democratizing access to premium financial products in marginalized communities.
- Anchored in responsible lending practices, strategic partnerships, and an unwavering commitment to financial well-being.
- While conventional credit assessments rely solely on credit bureau data, CedisPay takes a bold step forward. We leverage alternative data sources, including bank statements, pension statements, savings statements, social media interactions, e-commerce transactions, and mobile money statements. Our approach involves a comprehensive analysis of various factors, such as spending patterns, bills payment behavior, savings behavior, transaction history, balances, utilization, and the consistency of funds. This allows us to make informed decisions about customer creditworthiness.
CedisPay’s Goals and Innovative Trajectory:
- Goals:
- Fostering customer financial well-being.
- Achieving a repayment rate of at least 95%.
- Delivering an unparalleled lending experience marked by exceptional convenience.
- Offering the lowest interest rates to borrowers.
- Catering specifically to underserved markets and communities.
- Providing remarkable speed with loans disbursed within an impressive 5-minute timeframe.
CedisPay’s Commitment to Responsible Lending
A Rigorous Risk Assessment Framework and the Power of Alternative Data
In the ever-evolving landscape of fintech lending, CedisPay stands out for its unwavering commitment to responsible lending practices. At the core of our success is a comprehensive risk assessment framework that prioritizes customer financial well-being, ensuring that character holds precedence over mere financial metrics.
Correlation with Alternative Data: A Global Trend
Drawing inspiration from global fintech pioneers like LendingClub and findings from the Philadelphia Federal Reserve Bank report, CedisPay’s success is intricately linked to the adept use of alternative data. This correlation underscores a paradigm shift where non-traditional data plays a pivotal role in reshaping credit assessments.
Key Achievements and Strategies:
- Impressive Non-Performing Loan (NPL) Rates: In 2023, CedisPay achieved a remarkable less-than-5-percent NPL rate for loans originated that year. This stellar performance significantly outshines the industry standard of 20 percent NPL per bank, as reported by the Bank of Ghana’s January 2024 summary of economic and financial reports.
- Transparency and Resilience: Transparently acknowledging a surge in NPLs in 2022 due to challenges with a group-guaranteed loan, CedisPay took decisive steps to enhance risk management in 2023. This involved canceling group guarantees, restructuring loans, and witnessing substantial recovery.
- Outstanding Repayment Rate: From inception to date, CedisPay boasts an enviable 93 percent repayment rate, a testament to our commitment to financial prudence.
Data-Driven Credit and Income Verification:
CedisPay’s success is not arbitrary; it is rooted in meticulous credit and income verification processes:
- Comprehensive Credit Bureau Checks: Rigorous scrutiny of all credit bureau reports in Ghana, with any red flags leading to a decline in loans, even for pension-backed loans.
- Thorough Mobile Money and Bank Statement Reviews: In-depth analysis of mobile money statements and bank statements to construct a holistic financial profile.
- Risk Factor Assessment: Evaluation of risk factors such as excessive debts, gambling habits, and adjustments for income volatility.
- Final Debt-to-Income (DTI) Calculations: Rigorous DTI calculations with adjustments to loan amounts if DTI thresholds are breached.
CedisPay’s commitment to responsible lending, transparent practices, and the strategic use of alternative data positions us as a beacon in the global fintech landscape, revolutionizing financial inclusion and well-being.
CedisPay’s Diverse Product Lineup:
To kickstart its mission of providing access to underserved communities through alternative data, CedisPay has strategically forged partnerships with other financial providers, resulting in three key products:
- Pension-Backed Loans:
- Leveraging alternative data such as customer pension contributions, savings history, and behavior, coupled with credit bureau data.
- Agreement with pension trustees to hold pension assets as collateral for the loans
- Agreement with Bank/employer/payroll deduction companies for direct loan repayments deductions
- Payroll Deduction Loans:
- Anchored in innovative collaborations with payroll providers, these loans leverage alternative data from bank, savings, mobile money statements using spending patterns, bills payment behavior, savings behavior, transaction history, balances, utilization, and the consistency of funds to extend financial assistance.
- Agreement with Bank/employer/payroll deduction companies for direct loan repayments deductions
- Mobile Money Deduction Loans:
- Unveiling a pioneering approach, these loans tap into alternative data sources related to mobile money transactions, using spending patterns, bills payment behavior, savings behavior, transaction history, balances, utilization, and the consistency of funds to extend financial assistance, ensuring a comprehensive assessment of creditworthiness.
- Agreement with Bank/mobile money companies for direct loan repayments deductions.
CedisPay Pension-Backed Loans: Responding to the evolving financial landscape, our innovative pension-backed loans address the short-term financial needs of tier 3 pension contributors.
Benefits of CedisPay’s Pension Backed Loans:
- Tax Advantage:
- Opt for a CedisPay loan over pension Tier 3 withdrawal for a crucial tax advantage.
- Competitive Interest Rates:
- Access funds at a highly competitive interest rate of 2.5% per month.
- Preservation of Retirement Savings:
- Preserve your hard-earned pension Tier 3 savings for a stronger financial foundation.
- Financial Well-being:
- Cultivate sound financial habits and attain your goals with our support.
- Financial Identity:
- Build a comprehensive financial identity transcending traditional credit history.
Apply for a Pension-Backed Loan Today: Your Gateway to Financial Opportunities
- Visit our website: https://cedispay.com.gh/
- Select “Pension Backed Loans”: Choose this option on the homepage.
- Choose Your Tier-3 Pension Contribution Company: Pick from the list provided.
- Follow the Application Process: Our dedicated team is ready to guide you, ensuring a seamless experience.