A smartphone that is usually priced below $50, probably the cheapest in the world, will start selling in a week. If Mukesh Ambani’s JioPhone Next, an Android device custom-built for India by Alphabet Inc.’s Google, is a hit in the price-conscious market, it will solve one problem for banks while posing another.
With the remaining 300 million feature phone users in the country coming online, there will be an increase in customer data that can replace warranty. The question is how will the banks get their hands on it? One response came from iSPIRT, a small group of political influencers quietly setting technology standards for India’s digital markets, urging companies to enter new open-networked markets, from online payments to healthcare.
The Bengaluru-based group champions a new set of players – account aggregators – to unlock a much sought-after prize: Bringing the 80% of adults in developing countries into the folds of formal credit (40% in rich countries) who do not borrow money from traditional institutions.
But these people and their micro-businesses are increasingly online thanks to innovations like JioPhone Next. They pay rent, rates and utility bills and receive payments on their smartphones, scattering their footprints all over the internet. Account aggregators will gather these digital crumbs for people to share their own data in a machine-readable format for a bank loan application.
Introducing a layer of consent handlers is important. Emerging market borrowers can have many types of account-based relationships. Yet they can be useless to banks if they cannot present a composite picture of their financial lives to access formal loans that are monitored by credit bureaus.
More than three-fifths of India’s adult population is either invisible to credit rating agencies or considered not worth it by mainstream credit institutions. In an advanced economy like the United States, services like Experian Boost and LenddoScore help bridge the visibility gap for subprime borrowers by encouraging them to voluntarily submit their utility or video streaming bills to demonstrate their creditworthiness.
But in an emerging market with low financial literacy, banks prefer to leave the bottom of the pyramid to lenders who know the borrower in real life or who have some social leverage over them, such as microfinance companies that lend to women’s groups.
Conversely, technology platforms, intimately aware of their customers’ online behavior, can grant them loans, collecting fees while leaving the risks to the banks. Jack Ma’s Ant Group Co. cornered nearly a fifth of China’s short-term consumer debt before Beijing broke the game.
Not all countries can afford to use heavy artillery against their private sector: politics would not allow it. Aggregators can be a much more flexible tool for maintaining lending market fairness, giving banks a reasonable economic chance to compete with data-rich tech giants.
Take JioPhone Next. It will provide data on a large segment of the underbanked population. Jio, Ambani’s 4G telecommunications network, will capture some of that when subscribers to its cheap data plans buy groceries from JioMart, an online partnership with neighborhood stores across India.
Google will also get valuable data about user location and search queries. Facebook Inc will leverage its own knowledge as the social media giant adds to its half-billion-dollar Indian customer base for WhatsApp and a growing craze for Instagram Reels, a video-sharing platform. Unsurprisingly, Google wants to influence the Indian deposit market and Facebook is eating away at the small business loan pie.
When it comes to real-time data, banks can never match the weight of platforms. But snapshots from account aggregators can help them take a break. Just enough additional data that will tell them if a customer is more creditworthy than a low (or zero) credit score suggests can make a big difference in profit, especially since banks won’t have to pay high fees to Jio, Google or Facebook for their proprietary ratings.
By explicitly owning and sharing their data, customers will avoid being trapped by the tech industry’s biased algorithms. Small businesses will be able to show their cash flow to lenders by aggregating everything from tax payments to customer receipts. Once the telecommunications companies get on board, an affordable “buy now, pay later” plan for buying a refrigerator will become possible for a low-income family who regularly pays their phone bills.
Aggregation, being a utility, will be like tap water for the Evian platforms, and will be priced accordingly. Who will own the pipes? Walmart Inc’s PhonePe, which operates India’s most popular digital wallet, has received approval in principle to be an aggregator from the central bank. Eight banks, which together account for 48% of all accounts in the country, have agreed to use the framework, which went live on Thursday.
It’s a good start. Banks desperately need help to stay in the money game. Or they will just cry to regulators and ask them for special Big Tech protections. It would hurt experimentation and delay the credit revolution that $50 phones can spark.
June 03, 2022