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This article was provided by Frederick Busler, Consultant and Analyst.
About one in four American adults is underbanked, meaning they are undersaved by traditional finance and rely on high-fee alternative financial systems. For underbanked Americans, getting a loan or credit card can be difficult or even impossible. Those who have a credit score are often not very high. As a result, Americans are turning to money orders, payday lenders, and check cashing services.
Underbanked Americans are much less capable of ‘moving forward’ economically, which further perpetuates the cycle of poverty. To break this cycle, we need to find a way to bring Americans into this position with equal 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 old and often irrelevant in today’s economy. They fail to account for 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 can make your credit score obsolete.
AI is enabling better lending system and early wage access
AI can help lenders more accurately assess borrower risk. He can do this by analyzing data that is not included in the traditional credit score, such as whether the borrower spends on his capital needs or luxury. AI can also help lenders identify potential risk factors that may not be clear, such as whether the borrower is overusing their available credit.
This means that, in the future, AI will be able to completely replace traditional credit scores. This will allow more Americans who are without a bank to access traditional financial services. In addition, this will help reduce the risk of default for lenders, leading to lower interest rates and lower fees.
In the U.S., for example, fintech startup B9 raised $ 5 million to bring early wage access to the market. This service allows employees to receive their full pay check 15 days in advance, without paying any fees. The company uses this AI to predict the risk level of the borrower, which is fueled by data such as user paycheck, employment history, age and financial behavior. In this way, by providing insights into their financial behavior patterns, consumers avoid the high-interest rates charged by pay-day lenders.
The traditional credit scoring model is a global problem. In Africa, for example, about 57% of the population is “credit invisible” – meaning they do not have a bank account or a credit score. As a result, these people have difficulty getting approval for a loan or credit card. This is where AI comes in again. AI-powered credit tools such as Weza and CredoLab are taking advantage of alternative data such as phone metadata to ensure that anyone can access financial services.
Empowering the underprivileged
These AI-based solutions are empowering disadvantaged people by giving them access to traditional financial services. This, in turn, helps to break the cycle of poverty and improve their ability to move forward economically.
In fact, one analysis found that providing access to traditional financial services increased the presence of businesses in the area by 7.6% while driving higher levels of revenue. This is because traditional financial services allow people to save money, invest in their businesses and make purchases that they would not otherwise be able to make.
AI makes it easier for lenders to assess borrower risk, leading to lower interest rates and lower fees. This is helping to empower the disadvantaged by giving them access to traditional financial services.
Financial inclusion can also boost economic growth. A study by the International Monetary Fund found that for a country with a low level of financial inclusion, improving financial inclusion to the 75th percentile would increase GDP growth by 2% to 3%. This is because when more people use traditional financial services, they are able to participate more fully in the economy.
While AI will not change credit scores overnight, it is clear that it has the potential to do so in the future. This will be a game-changing development, as it will give 1.7 billion people worldwide access to traditional financial services.
Frederick Bussler is a consultant and analyst with experience in 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, and other outlets, and is available to audiences, including IBM and Nikkei.
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