Outlook Money
Without a credit score, banks have started using alternative data, which provides information about a person's financial behaviour.
The alternative data includes, rent payments, mobile bill payments, electricity usage, wallet bills, UPI payments, and online shopping. Such a data helps banks to get a credit signal about the individual.
Technology like AI and machine learning (ML) algorithms can analyse large sets of data volumes of digital behaviour for patterns that are related to creditworthiness.
Banks feed the software with historical repayment data and the system then learn to estimate the probability of repayment from new applicants.
Some banks also consider a borrower's educational level, job status, or profession and try to understand the risk profile. Good risk scores are offered by the salaried employees.
This use of alternative data is beneficial for individuals like gig workers, freelancers, street vendors and small business owners, as they can now borrow money based on their online behaviour rather than documentation or collateral.
There are a lot of people who pay bills in cash and also don't shop online, form them the digital scores can not be calculated adequately.
There are a lot of individuals who lack access to smartphones and continuous internet connection or are unfamiliar with online interfaces. In such cases, it becomes difficult to get the personal information.