Credit risk assessment is an essential process for financial institutions that need to determine an individual’s creditworthiness. This process involves evaluating the borrower’s ability to repay the loan and the likelihood of defaulting on it. There are many ways to use alternative credit assessment tools. One such key source of information for credit risk assessment is financial SMS data In this article, we will explore how financial SMS data can be used for credit risk assessment.
What is financial SMS data?
Financial SMS is a type of alternative source of data that lending institutions can collect from their customers’ mobile phones. This data includes information about transactions, such as the amount, date, and location of the transaction, as well as other relevant financial information, such as balance and credit limit. Financial SMS data is an unstructured dataset, which means that it can be difficult to extract insights from it.
Financial SMS data can act as a very important alternative data source and can be used in several ways to assess credit risk. This can play a pivot role to supplement the traditional models being used for credit risk assessment of credit applications. Here are some of the most common applications for alternative credit scoring based on financial sms data to improve the effectiveness of credit scoring and credit access to loan applicants:
- Payment behavior analysis
One of the most common uses of financial SMS data for credit risk assessment is to analyze the borrower’s payment behavior. By analyzing SMS data, lending organization can gain insights into the borrower’s repayment history, such as how often they make payments and how much they pay. This will also provide insights for user’s credit history based on the past loans, credit cards etc. This information can be used to evaluate the borrower’s ability to repay the loan and the likelihood of defaulting on it. This information is similar to credit report provided by Credit Bureau (or credit reporting agencies) but SMS based reports cover wider payment behaviour.
- Spending patterns analysis
Financial SMS data can also be used to analyze the borrower’s spending patterns. By analyzing SMS data, lending institutions can gain insights into the borrower’s spending habits and identify any potential red flags, such as excessive spending or irregular transactions. This information can be used to evaluate the borrower’s financial stability and ability to repay the loan. This report is more comprehensive than a bank statement to cover the financial transactions, bank accounts etc. Also this improves the customer experience as they don’t have to struggle to provide multiple bank statements. SMS based spending pattern analysis plays a key role in alternative credit scoring process
- Geolocation analysis
Geolocation analysis is another application of financial SMS data for credit risk assessment. By analyzing SMS data, lending institutions can gain deeper insights into the borrower’s location and identify any potential fraud or suspicious activity. For example, if a borrower’s SMS data shows transactions from multiple locations within a short period of time, it could be an indication of fraudulent activity.
- Behavioral analysis
Finally, financial SMS data can also be used for behavioral analysis. By analyzing SMS data, digital lending business can gain additional insights into the potential borrower’s behavior and identify any potential risks or red flags. For example, if a borrower’s SMS data shows a sudden increase in spending or a change in spending patterns, it could be an indication of financial distress or a change in their financial circumstances. This can be used to build a comprehensive risk profile of the customers and prepare an alternative credit score (also known as traditional credit score). SMS based insights can play important role in all such credit scoring models as there are valuable insights available through this data.
Conclusion
In conclusion, financial SMS is important alternative source of data and it can provide valuable insights into a borrower’s creditworthiness and ability to repay a loan. Lending business and business owners can use SMS data for payment behavior analysis, spending patterns analysis, geolocation analysis, and behavioral analysis, among other applications. By leveraging SMS data, lending business can make more informed lending decisions for loan applications and reduce the risk of defaulting on loans. Drawing on alternative data sources such as SMS, helps lenders widen their pool of applicants who meet their eligibility requirements and also improve access to credit for customers for financial inclusion. However, it is important to ensure that data privacy and security protocols are in place to protect users’ sensitive information.
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