By Grant Tudor. This post originally appeared on Forbes.
Typically, loan officers evaluate risk and package financial products based on the information provided by credit reports. We can take out mortgages or apply for business loans because banks can pull historical financial data to assess our ability to repay. The credit risk system is inseparable from modern economies. But what happens when there isn’t a financial paper trail, when one of the two and a half billion individuals with no financial record applies for a loan?
As Nicole Stubbs of First Access explained to me, one of two things typically happens: those individuals either remain locked out of the formal financial system, or they’re subject to exceptionally high borrowing costs. Even those groups with the express mission of servicing the unbanked and under-documented – like nonprofit microfinance institutions – struggle to mitigate the risks of operating without good data.
So what if we re-imagined the risk assessment system altogether? Do we need financial data, anyway? If a loan applicant has no banking paper trail, could we pull other data sets to assess her credit risk? We know that a borrower’s social capital is a pretty reliable indicator of repayment likelihood. So could we, say, measure social network strength from mobile phone data to evaluate risk?
As a Social Innovation Fellow at this year’s PopTech conference, Nicole is one of ten featured social entrepreneurs interrogating long-held assumptions about how systems can and can’t work. Why should risk be measured against financial history alone? By combining untapped demographic, financial, geographic, and social network information from mobile phone records and other objective sources, the company is predicting risk in novel ways for those who don’t have a bank account or credit score.
First Access represents a genus of social enterprise that’s concerned less with tweaking a poorly functioning system, and more with why the system is functioning poorly to begin with. They question the assumptions on which the current systems rest. PopTech Fellow Anushka Ratnayake, founder of myAgro, is likewise calling into question a longtime status quo: why is the financial market failing to service small-scale farmers, the majority of the world’s poor? While many microfinance institutions are reaching rural farming communities, most are focused largely on the provision of loans. But are loans always the best answer?
As Anushka explains, there are a number of faulty assumptions made when lending to small-scale farmers. For example, loans made during planting time for upfront seasonal costs assume that inputs like fertilizer and seed are available; they’re often not. The provision of loans big enough to invest in larger fields overlooks the risk-averse nature of small-scale farmers. And the expectation of incremental loan repayments ignores the variability of seasonal cash flow that makes regular payments unlikely.
But most gravely, the current system assumes that small-scale farmers are too poor to save. “Which isn’t true,” according to Anushka. “Farmers would like to save, but live so far away from banks that their savings payments would be dwarfed by the transport costs and bank fees.” So myAgro, a Malian social enterprise, has pioneered an alternative system that matches how farmers already manage their money. Using a prepaid scratch card model – similar to buying prepaid mobile minutes – farmers can pay in advance for fertilizer, seed and training packages by buying a myAgro card at a local store (from 50 cents to $50), depositing the money into a layaway account by texting in the scratch-off code. After a year of buying the scratch cards, myAgro delivers the fertilizer, seed, and training they’ve paid for at planting time.
Through this bank-less savings scheme to date, average harvests for customers have increased by 80 percent over traditional farms, equal to a $234 per farmer increase in net profit. “We aren’t asking farmers to adopt an outdated financial system,” says Anushka. “We’re changing the system to adapt to them.”
Social enterprises like these tend to form in response to system failures—the malfunction of government to successfully render social services, or the failure of the market to efficiently allocate goods and services. Yet most of the time social “innovation” is palliative, tinkering within the parameters of a system to mitigate harm or make it partially more responsive to the needs of those marginalized or underserved by it. But big impact usually happens when we address the fundamental causes of a system’s failure, not just its effects.
By unlocking latent data, First Access is enabling the market to more efficiently supply credit to the poor. By designing a savings system to match farmers’ behaviors, MyAgro is proving that the poor will save. By questioning—or obliterating—the assumptions that keep them back from solving a system failure, these social entrepreneurs are showing us what it means to lay the groundwork for big, sustained change.