Regulated financial services can offer access to sustainable and responsible credit products in ways that can be supercharged by AI
With 1.7 billion people around the world unbanked or underbanked, there is still much to do to bring the underserved into the financial mainstream. Access to finance and the formal economy can unleash economic opportunities and raise standards of living for the underserved.
This is especially true in Southeast Asia. According to the World Economic Forum, six in 10 people in this region are unbanked or underbanked today. In Vietnam, it’s as many as seven in 10.
AI is transforming industries at a rapid pace, and Southeast Asia’s consumer finance landscape is no exception. By speeding up data collection and analysis, these technologies enable quicker pre-lending assessments and lending procedures. Lenders benefit from enhanced efficient risk management and streamlined processes and can now serve customers who were previously unbankable due to a lack of credit history.
However, there are two drawbacks to AI that have to be carefully considered.
First, automated processes can speed up decision-making and enable access to finance but are not perfect solutions. For example, AI assumes a borrower’s creditworthiness on standardised characteristics, which can exclude borrowers that don’t always fit, especially when you’re credit invisible. If the data sets used to train the AI system are biased, it may also lead to skewed processes that may treat prospects and borrowers unfairly.
Secondly, technological advancements have also led to a surge in unregulated lenders. Indonesia had around 150 registered P2P lenders before President Joko Widodo ordered a moratorium on permits for fintech lenders in 2021 to clean up the sector.
The Reserve Bank of India found that more than 600 of the 1,100 digital lending applications operational between January 2020 and February 2021 were unregistered and illegal, which unnecessarily hinders the progress of financial inclusion.
There are two key principles lenders should consider increasing more safely and sustainably to ensure the development of the sector: responsibility and financial literacy.
Responsible lending practices
To achieve financial inclusion, we need to ensure the consumer finance industry is properly regulated and doesn’t harm populations already at risk. Without government oversight, predatory lenders may intentionally introduce products with unfavourable terms and engage in deceptive and coercive practices.
These could include providing misleading information about terms and conditions, exorbitant hidden fees and penalties, or illegal and unethical debt collection tactics, such as harvesting data from phones to harass debtors when they are unable to repay their loans.
People with limited financial knowledge are most likely to fall into these traps, perpetuating a vicious financial cycle and creating further financial distress for these vulnerable populations.
Unregulated lenders also exploit AI to speed up the lending process, giving less time for borrowers to make informed decisions and making them more susceptible to debt traps. Automated processes reduce transparency in application processing, making it harder to detect discrimination or predatory lending targeting specific groups.
As technology and the economy evolve, consumers need even better protection from the growing array of complex financial products. That’s why government oversight is needed.
Regulated financial services can offer access to sustainable and responsible credit products in ways that can be supercharged by AI. For example, combining AI with traditional credit bureau data helps lenders to balance risks and maximise financial inclusivity, ensuring loans are offered responsibly based on repayment capabilities.
Home Credit has embraced this type of lending model – for instance, 42 per cent of its customers in 2022 were first-time borrowers using regulated financial services for the first time. This was a 19 per cent increase from 2021.
Responsible lenders can also offer consumer protection services, like payment holidays or repayment insurance, shielding customers from credit risks. For example, Home Credit provided 2.2 million customers with the option of paid holidays and deferred payments during the peak of the Covid-19 crisis in 2021.
Many companies in the region now offer cooling-off periods, allowing people to cancel loans free of charge. This allows borrowers time to properly consider their decisions and facilitates informed decision-making.
As Southeast Asian markets mature, regulated lenders can expand their offerings to include a wider array of financial products, such as insurance. Life insurance penetration in emerging Asia Pacific markets rose to 2.4 per cent in 2021 but still lagged substantially behind developed Asia Pacific markets (8.4 per cent). Regulated lenders have the advantage of existing customer relationships and data and can offer accessible, personalised insurance products tailored to individual needs.
For example, Home Credit now partners with more than 20 insurance providers, offering various solutions to customers that range from life insurance to accident insurance for mobile phones. These broader offerings help clients better manage their financial health, supporting them in enhancing living standards and financial security in the long run.
Educating customers and prospects on the vast array of financial products and services available as well as basic financial management principles is also essential, as this knowledge in making better financial decisions beyond our relationship with them.
Consumer finance firms needn’t limit themselves to educating or working with existing customers even though Home Credit serves around 140 million customers around the world and has reached 225 million people globally in 2022 through financial literacy activities.
Financial literacy activities can take the form of publicity campaigns through popular mediums, such as radio or social media, direct community workshops and consumer-facing campaigns. While a significant investment, consumer lenders can reach new markets, build a stronger brand and enable inclusion, improving the long-term well-being of customers.
Consumer finance players can also better enable societal development and inclusion by focusing financial literacy efforts in particular ways. For instance, research shows that women generally have reduced access to formal financial services than men.
They also have specific financial literacy needs, as they tend to live longer and earn less than men, according to an OECD study. Through programmes tailored to improve women’s financial literacy, lenders can potentially increase their economic participation, promoting gender equity and making an impact on individual women, their families, and the wider society.
Digital literacy is also a crucial component, as many of the financial transactions are now processed online. It is also a big factor contributing to customer protection in this digital age. An Asian Development Bank Institute research study shows that digital literacy has significant positive effects on saving and borrowing as well as risk management behaviours. The crucial point is that despite the rise of AI and its enormous capabilities, a human approach to financial inclusion is more important than ever.
According to a PwC study on digital pathways to financial inclusion, AI could have a transformative impact on the lending business. They estimate that a 15 to 30 per cent rise in AI-facilitated credit approvals could take place with no impact on loss rates for lenders. Despite the genuine promise that new technology offers in this space, financial literacy and broader inclusion efforts cannot be ignored.
As technology transformation accelerates changes in multiple industries, the financial services sector cannot lose sight of the critical goal of empowerment and inclusion of communities.