From Cash to Credit: How AI and Alternative Data Are Powering Change in LATAM’s Largest Markets

AI and Alternative Data: Closing the Credit Divide

Millions in Brazil and Mexico continue to face financial exclusion, unable to access the banking systems that are essential for economic empowerment. By leveraging AI and alternative data, financial institutions are beginning to bridge this gap, creating innovative solutions to better assess creditworthiness. Traditional credit scoring models, though foundational, often fall short in capturing the diverse financial behaviors of these populations. This gap is most evident among micro-entrepreneurs, informal workers, and rural communities—groups that may lack formal financial histories yet exhibit strong financial responsibility through non-traditional means.

Challenges in Traditional Credit Scoring

Traditional credit scoring models rely heavily on formal credit histories and banking relationships, leaving large segments of the population underserved.

In Mexico, 49% of adults are underbanked, with 82% relying primarily on cash for transactions, according to the National Banking and Securities Commission. Only 37% of adults have a formal credit history, and approximately 41.1 million individuals remain unbanked.

In Brazil, while over 70% of adults have access to financial accounts, 45% remain underbanked. Insights from the World Bank highlight that many rural and informal workers lack the documented credit behaviors needed for conventional credit assessments, leaving significant portions of the population excluded from essential financial services.

This exclusion creates untapped potential for financial institutions and denies millions access to essential financial services. For lenders, it highlights the need for innovative solutions to bridge these gaps and expand financial inclusion. 

A New Standard for Credit Scoring: Powered by AI and Alternative Data

Alternative data is emerging as a transformative tool for financial institutions in Brazil and Mexico, helping bridge the credit gap. These sources—such as mobile phone usage, utility payments, and e-commerce transactions—unlock insights into financial behavior that traditional methods overlook. When paired with AI and machine learning algorithms, this data enables lenders to paint a comprehensive picture of creditworthiness, even for individuals without formal credit histories.

Institutions harnessing the power of alternative data are not just evaluating borrowers—they’re redefining the future of financial access. By reducing risk and extending credit to underserved populations, these trailblazers are turning financial exclusion into a dynamic opportunity for growth, inclusion, and industry leadership.

Key Applications of Alternative Data in Action:

• Telecom Data: Mobile phone usage patterns, such as top-up frequency and payment histories, provide valuable indicators of spending habits and financial stability. For instance, consistent mobile payments can demonstrate an individual’s reliability, even in the absence of a formal credit history.

• Utility Payments: Timely payments for services like electricity and water serve as proxies for financial discipline. These records allow lenders to assess an individual’s ability to manage recurring financial obligations.

• E-commerce Transactions: Digital purchase trends and payment behaviors on e-commerce platforms offer insights into consumption patterns, purchasing power, and financial activity. With the rise of online marketplaces in Brazil and Mexico, this data has become particularly relevant in credit assessments.

• Behavioral Data: Social media engagement and other online activities, while still emerging as a credit metric, can add an additional layer of understanding to an individual’s financial behavior. Behavioral data can help refine risk assessments and offer deeper insights into spending and saving habits.

AI and Machine Learning: Amplifying Impact

AI and machine learning technologies amplify the potential of alternative data by analyzing vast datasets in real-time, identifying patterns, and delivering predictive insights. These tools enable lenders to:

• Increase approval rates by evaluating previously unscorable individuals.
• Reduce default risks through more accurate credit assessments.
• Streamline credit decision-making processes, enhancing speed and efficiency.

The integration of alternative data and AI is not just about improving credit scoring—it’s about reimagining financial access and empowerment for millions. By leveraging these tools, financial institutions in Brazil and Mexico are not only addressing long-standing challenges but also laying the foundation for a more inclusive and dynamic financial ecosystem.

Success Stories in LATAM

MercadoLibre’s AI-Driven Lending (Mexico)

MercadoLibre, a leading e-commerce platform in Latin America, has successfully harnessed alternative data and AI to transform credit access. Reuters reports that by analyzing user behavior on its platform, MercadoLibre offers instant loans to buyers and sellers, enabling small businesses to scale and increasing market participation. This innovative strategy has significantly expanded credit access, serving as a model for financial inclusion in the region.

Fintech Innovations in Brazil

In Brazil, fintech startups are revolutionizing credit scoring by integrating telecom and utility data into AI-powered models. According to Finnovista, this approach has driven a 40% increase in loan approvals for micro-entrepreneurs and rural borrowers while reducing default rates by up to 30%. These advancements highlight how AI and alternative data can effectively bridge the credit gap for underserved populations, paving the way for broader financial inclusion.

Global Perspectives on Alternative Credit Scoring:

The benefits of alternative data and AI extend beyond LATAM, driving transformative outcomes worldwide:

• 30% increase in credit approvals for borrowers without traditional credit histories.
• 20% reduction in default rates through more accurate AI-driven risk assessments Broader customer bases and enhanced profitability for financial institutions, achieved through reduced delinquency rates and inclusive lending practices.

The Path Forward for Financial Institutions

To address the challenges of credit risk assessment and expand financial inclusion, financial institutions in Brazil and Mexico must prioritize alternative data and AI-driven models. These technologies unlock the potential to:

• Expand access to underserved markets: Alternative data provides insights into populations traditionally excluded by conventional credit scoring.
• Reduce biases in credit assessments: AI-driven solutions mitigate the limitations of traditional methods, fostering equitable lending practices.
• Strengthen trust and loyalty: By addressing the needs of underbanked and unbanked populations, institutions can build lasting relationships and tap into a vast, untapped customer base.

As the financial ecosystem evolves, institutions that integrate alternative data and AI into their operations will not only enhance their competitiveness but also contribute significantly to regional economic growth and stability.

Rewriting the Rules of Creditworthiness

The innovative application of alternative data and AI is reshaping the definition of creditworthiness. By leveraging telecom usage, utility payments, and other non-traditional data points, financial institutions can offer more inclusive credit options while managing risk more effectively. This transformation is about more than technology; it’s about creating opportunities that empower individuals and communities.

Leading this transformation are 1datapipe’s Super Score for Financial Inclusion and Credit Uplift Solution—innovative, purpose-built approaches addressing the complexities of financial inclusion. As a leader in AI-driven analytics and alternative data solutions, 1datapipe integrates traditional credit bureau data with alternative data sources to deliver a holistic view of creditworthiness, enabling lenders to evaluate previously unscorable individuals with unprecedented precision. The outcomes are tangible: higher approval rates, reduced default risks, and broader access to credit for underserved populations, including rural workers and those in the informal sector.

By collaborating with local credit bureaus, financial service providers, and reseller partners, 1datapipe is addressing systemic challenges and setting new industry benchmarks. Through its commitment to innovation and strategic alliances, 1datapipe enables financial institutions to adopt smarter, more inclusive credit assessment practices.

Be part of this transformative journey.

Whether you’re a financial institution or a reseller seeking innovative solutions, connect with 1datapipe to explore how our tools can empower your growth, drive inclusion, and redefine what’s possible in financial services.