By Shashank Sharma, Director, ScoreMe Solutions
Digital lending, with its extraordinary ability to parse creditworthiness through a borrower’s digital footprint, has the potential to transform the credit industry. This data, which can predict consumer default and assess credit risk, can in some cases provide a more accurate assessment of a borrower’s creditworthiness than traditional credit bureau scores do.
Digital lending, while convenient, comes with its fair share of challenges that need to be addressed head-on to ensure responsible and ethical lending practices. The persistence of issues concerning data security, privacy protection, bias and discrimination, lack of transparency, and limited oversight and regulation remains a serious threat to fair and responsible lending practices, leaving them vulnerable to potential harm. A recent study by the cybersecurity firm UpGuard found that an unsecured database belonging to a digital lending platform in India had exposed the personal and financial data of millions of borrowers. This data included names, bank account numbers, loan amounts, and other sensitive information. Such breaches not only expose sensitive information but can also have severe consequences for borrowers, including identity theft and financial fraud.
Google recently announced a series of new restrictions that will be implemented across all apps offering personal loans or facilitating access to such loans on the Play Store. The question at hand is not whether the usage of such apps ought to be limited, but whether the regulatory bodies should have taken a bold stance and deemed them inadmissible. The answer is a resounding yes. The lack of clear standards in this relatively new field can make it difficult for borrowers to understand their rights and protections, as well as for lenders to operate in a responsible and fair manner.
Yet another grave concern related to the use of digital data in credit scoring is the protection of individuals’ privacy. Lenders need to be transparent about what data they are collecting and how they are using it, and individuals should have control over their own data and be able to opt out of data collection and sharing. The use of algorithms in credit scoring raises concerns about potential bias and discrimination, as algorithms may perpetuate existing biases in the data used to train them. The lack of transparency in the use of complex algorithms in credit scoring can make it challenging for individuals to correct any errors in their credit reports or challenge the accuracy of their credit scores.
To accentuate the positive, digital lending not only benefits borrowers, who may be able to access the credit they wouldn’t otherwise qualify for, but also lenders, who can minimise the risk of defaults. It can help bridge the financial inclusion gap by providing access to credit for underserved populations who may have been overlooked by traditional lenders. This not only benefits borrowers but also stimulates economic growth by increasing access to capital for small businesses and entrepreneurs. Moreover, digital lending can help individuals, hitherto overlooked, establish credit histories, thereby increasing their chances of accessing other financial products and services in the future. With these potential benefits, it’s crucial that digital lenders prioritise responsible and ethical lending practices to ensure that their services are accessible and affordable for everyone
Digital borrowing can sometimes feel like trying to understand a foreign language without a translation app. You might think you’re agreeing to a simple loan, but in reality, you’re committing to a complex web of terms and conditions that could bury you deeper than a mole in a hole. In the end, it’s not just the borrowers who suffer from this confusion – it’s the lenders too, who risk losing their customers to competitors with more transparent loan agreements. Besides providing clear and concise information about loan terms, fees, and charges in plain language, lenders need to provide interactive tools or resources to help borrowers better understand their loan terms and how they will impact their overall financial situation.
Lenders also need to ensure that the algorithms used in credit scoring are not only accurate but also free from bias. This requires careful evaluation and monitoring of the data used to train the algorithms, as well as regular audits to detect and correct any biases that may arise. Furthermore, lenders must provide clear and accessible channels for borrowers to dispute errors in their credit reports or challenge the accuracy of their credit scores. It is also essential for lenders to develop a culture of responsible lending that prioritises the financial well-being of borrowers over short-term profits. This can include offering flexible repayment options and actively working to prevent borrowers from falling into debt traps.