May 31, 2023

Can Alternative Credit Data and AI Technology Overcome Credit Scoring Challenges in Brazil?

Can Alternative Credit Data and AI Technology Overcome Credit Scoring Challenges in Brazil?

Understanding the past is key to shaping the future, especially when it comes to credit risk scoring in Brazil. This crucial element has been a determinant in the lending decisions of financial institutions, steering economic growth, and dictating the financial fate of individuals. However, the journey of credit scoring in Brazil is a tale of missed opportunities and exclusion of the underbanked population from the financial system. A journey back in time is necessary to fully grasp the urgency for novel credit scoring solutions in the present.


Credit risk scoring systems in Brazil have a history dating back to the early 20th century. Initial models leaned heavily on the subjective assessments of loan officers, focusing on the 3 Cs of credit – character, capacity, and collateral. While these models had their merits, they lacked objectivity and standardization, creating inequities and inefficiencies in the lending process.


The Evolution and Limitations of Traditional Credit Bureaus


The inadequacies of the existing credit risk scoring methods led to the formation of credit bureaus in Brazil around the mid-20th century. These organizations started pooling credit-related data from diverse sources, thereby creating databases that facilitated more informed lending decisions. This transition marked a significant stride in the credit landscape, increasing credit access for consumers and businesses.


Despite advancements, the new model had its shortcomings. The credit bureau data often turned out to be outdated or incomplete, leading to inaccurate credit scores. Moreover, the model overlooked a significant portion of the population that didn’t have any credit history, thereby excluding them from the financial system.


The Plight of the Underbanked Population


This issue of ‘credit invisibility’ was particularly pronounced in Brazil, where the underbanked population amounts to an alarming 70% of the total populace. These individuals, in spite of their potential creditworthiness, were sidelined from the financial system due to their lack of formal credit history. The paradox is palpable: a system meant to enable financial access was, ironically, the very barrier to financial inclusion.


The Promise of Alternative Credit Data in Brazil


Acknowledging the pitfalls of traditional credit risk scoring solutions paved the way for an innovative approach: alternative data-driven credit risk scoring solutions. Alternative data refers to information that falls outside the purview of traditional credit data. This includes rent payments, utility bills, employment history, social media activity, and many more seemingly insignificant details. However, when these data points are collated and analyzed, they can depict a detailed, dynamic, and precise picture of a consumer’s creditworthiness.


Leveraging AI and Machine Learning for Better Credit Scoring


Implementing an alternative data-centric credit risk scoring model comes with its challenges. These include sourcing, verifying, updating, and analyzing data from numerous unconventional sources. It mandates the use of cutting-edge technology, notably Artificial Intelligence (AI) and Machine Learning (ML).


Reflecting on the journey of credit risk scoring in Brazil, the transformation from rudimentary beginnings to the current shift towards alternative data, underlines the necessity to adapt to societal needs. Today, the importance of a precise, inclusive, and alternative-data-driven credit scoring system cannot be overstated. Especially in a country like Brazil, where a significant part of the population remains underbanked, this call for change resonates even more loudly.


The Role of AI in Enhancing Financial Inclusion


Financial institutions in Brazil now stand at the crossroads of a critical decision. They can choose to cling to outdated methods, or they can choose progress – harnessing the power of alternative data to facilitate financial inclusion, mitigate risk, and foster accelerated growth.


In the last decade, many have already recognized the opportunities that lie in alternative data-driven credit risk scoring models. Innovative companies, like 1datapipe, have emerged to facilitate this transition. 1datapipe, powered by advanced AI/ML technology, has pioneered solutions that address the challenges associated with the adoption of alternative data in credit risk scoring. Our Credit Trust Score and Financial Inclusion Score leverage alternative data to provide accurate and dynamic credit assessments.


Towards a More Inclusive Financial Future


The road to financial inclusion is still a long one. Yet, with innovative companies like 1datapipe taking the lead, the journey ahead appears promising. Financial institutions in Brazil are now equipped with the tools to facilitate a more inclusive financial future. The crucial decision lies with them: Will they choose to carry forward the legacy of financial exclusion, or will they choose to write a new narrative of financial inclusion?


Embracing the Future with AI and Alternative Data


The transformation of the credit scoring system is not merely a tale of technological evolution; it’s a narrative of societal progression. It underlines the necessity of financial systems to adapt and to do so with an inclusive approach.


If you’re a financial institution or lender looking to elevate your approach to credit risk scoring, it’s time to discover how 1datapipe can be part of your journey towards financial inclusion. With 1datapipe’s Credit Trust Score and Financial Inclusion Score, you can evaluate ‘credit invisible’ consumers, drive financial inclusion, and mitigate risk.


Let’s work together to create a more inclusive financial future in LATAM. Click here to learn more about our AI-powered customer analytics and how we can help you reach more customers.