FinPsych 101 — How Can Banks Safely Lend to the Unbanked and Underbanked?

The psychology of money is an intriguing topic. It studies how we view money, how we spend money, and how we save money. It explores how our financial behavior and monetary decision making can be triggered by our very own psychic makeup — conscious and subconscious.

Many of us spend money to fulfill our unmet emotional needs — for example, the need to fit in or conversely, the need to stand out. We might be trying “retail therapy” at a sad moment to lift our spirit up. The culture around us has an impact on our behavior as well. A posh environment that sensationalizes luxury purchases may push some of us to take loans only to “seem” rich, while it may have little or no impact on others of us.

While financial psychology is a complex process, today’s credit rating systems are based on simpler thinking. They analyze the accuracy, discipline, and timeliness of past payments to predict future behavior. It’s a linear, mathematical approach that doesn’t take the multifaceted human psychology into account. It also leaves out the unbanked and the underbanked as they don’t have sufficient track record, if at all.

Lending to the right people

People who are good with money aren’t the ones who know a lot about stocks and bonds or those with incredible math skills. A small farmer in Indonesia who has never put money in the stock market may very well be a more reliable borrower than a Wall Street guru. An unbanked village barber may pay his loan on time while a luxury salon owner in big city may default on her payments — even though she is a great candidate “on paper.”

So, is there a way to know who is likely to repay the bucks they have borrowed? And more importantly, how can banks correctly identify them from a large pool of applicants?

High conscientiousness

It’s possible to measure people’s habitual patterns of thoughts, emotions, and behaviors. To do so, trait psychology identifies a basic set of traits that persist across situations and over time. Among these, the trait of conscientiousness is about how responsible and reliable a person is. It’s about how they regulate and manage their impulses.

Individuals with a high level of conscientiousness tend to be good at setting long-term goals and working to achieve them. When they encounter obstacles along the way, they consistently continue to plan routes to their goals. Their friends and family perceive them as dependable and trustworthy.

Highly conscientious people make great candidates for loans — even if they have never taken out a loan before. Sitting at the cutting edge of artificial intelligence and trait psychology, our novel EmpathAI technology is built to identify such candidates even if they are underbanked or completely unbanked. In analyzing personality, EmpathAI further divides each trait into facets to achieve a more fine-grained analysis of a candidate’s personality.

The secret behind EmpathAI

EmpathAI evaluates each candidate based on their mobile phone use. It analyzes phone metadata only, and without extracting it. Not only does it respect user privacy, but it also complies with relevant international privacy regulations and directives. As people spend hours using their phones every day, their metadata is plenty enough to identify personality traits.

EmpathAI has shown that the combined measurement of specific traits, such as impulsivity and conscientiousness, provides a reliable score for lenders. Field-testing has provided further validation of EmpathAI’s predictive capabilities.

With EmpathAI, disadvantaged or previously unbanked households, small businesses, and underbanked people get access to loans, opening a new world of possibilities. This boosts prosperity for all and brings social and economic growth.

Contact us to learn more.