Several startups backed by Silicon Valley that are operating in developing countries are looking to change the lending landscape in the nations, where banks may be scarce and many prospective borrowers do not have a credit history on which to judge their credit scores.
According to experts, smartphones could significantly decrease the lending cost as the apps are able to generate a healthy amount of information that indicate thousands of behavioral patterns that are related with the borrower's chance of repayment or default.
Traditional microlending practices usually have much higher interest rates, often going beyond 25 percent, because the lending companies need to cover the cost of having to go out to the field to check if the borrower has the capacity to pay. In addition, banks have been reluctant in joining the practice because of the need to build physical outlets for the service.
The app-based lending startup companies have received support from some of the biggest names in Silicon Valley, with Branch.co having received investments from Palantir Technologies co-founder Joe Lonsdale after being founded by microlending pioneer Matt Flannery. Lenddo, which determines a borrower's creditworthiness through the analysis of their social media accounts, is backed by an investment firm that was created by eBay founder Pierre Omidyar. InVenture, another lending startup, is led by a former officer of the United Nations and is backed by venture investors Zachary Bogue and Chris Sacca.
These startups are resorting to apps that judge credit scores by taking a look at the smartphone usage of the borrowers.
Included among the information that affects the decision to allow a borrower to take out a loan include seemingly irrelevant things such as the number of times a person recharges their smartphone, the number of text messages that they receive, the distance that they travel daily and the method on how they input new contacts into their devices.
In Kenya, Branch.co allows users to apply to take out a loan through an Android app. The loans, which could get instant approval for immediate access to the money, have an average amount of $30 and interest rates of between 6 percent and 12 percent, depending on the creditworthiness of the borrower.
The algorithms of InVenture found that borrowers that wait until 10 PM has passed before making calls, when there are lower rates, present lower risks for loans. Branch.co, on the other hand, found that gamblers, which could be deduced through the borrower's messages or payments made to gambling companies, actually have a higher chance of paying back a loan compared to those that do not gamble.
These lending startups are building upon the growth of mobile banking in developing countries and the rise of smartphone adoption. As such, these companies could be bringing formal credit services to millions upon millions of people in developing countries for the first time, enabled by technology.