Editor’s Note: At the World Economic Forum, MasterCard CEO Ajay Banga led a public session on Inclusive Growth in the Digital Age. We’re hosting an Inclusive Growth series on our blog, inviting others to share perspectives.
Digital credit for poor customers is an area to watch in the next 3-5 years. Why? First, serving poor customers who can only pay back loans in small, frequent payments is now an attractive prospect. Digital platforms make it cost effective and profitable for companies to offer poor customers small denomination short term credit.
Second, it is no longer just financial institutions that have the information necessary to make credit decisions. The reality of excellent real time analytics of digital data means that there will likely be a proliferation of the types of companies that can offer these loans, potentially displacing financial institutions as the primary providers.
Third, the arrival of the digital ID in emerging markets, now being pursued as official government policy in India, and likely elsewhere in the near future, will increase the number of poor people who can qualify for basic financial services. A bigger customer base, more cost effective business models for offering and servicing small loans, and the emergence of a broader range of organizations that can make fast credit decisions all point to the potential of digital credit as being a disruptive force.
Will this be a positive trend? It depends. The number of poor people able to access credit will increase but experience tells us that the pace and unfolding of this expansion will differ according to geographic location. Only in those countries where policymakers and those who provide digital credit share a goal of providing poor people with responsible and responsive financial services, are we likely to conclude that the trend can help improve the lives of the poor. In addition, when credit can be extended to poor people digitally and the digital collection of their small, frequent repayments can be cost effective, companies can offer poor people financing for energy purchases, health care, and education. The social and economic inclusion prospects there could be profound and potentially transformative.