From invisibility to inclusion: Fixing the hidden barriers in credit access

Core Insights - The informal economy's participation is not adequately captured by traditional credit scoring models, which primarily rely on credit history, making it unsuitable for many individuals in the global south [1][4] - Financial exclusion is prevalent not only in developing countries but also in advanced economies, with significant unbanked populations in the US (5.6 million) and the EU (13 million) [3] - The barriers to financial inclusion extend beyond credit history, including cumbersome onboarding processes, limited digital infrastructure, and institutional risk aversion [4][6] Group 1: Financial Exclusion Dynamics - Financial exclusion is driven by a lack of visibility, particularly in developing markets where cash transactions dominate and many individuals work in the informal economy [2][5] - The lack of access to credit prevents unbanked individuals from building credit histories, yet the absence of credit history is not the sole barrier to financial inclusion [5][12] - Digital activity among unbanked individuals presents opportunities for credit access, but traditional lending models fail to leverage this potential [7][8] Group 2: Barriers and Solutions - High-friction onboarding processes and inadequate digital infrastructure hinder access to financial services, especially for rural and low-income urban populations [9][10] - Mobile-first fintech solutions are emerging to bypass traditional systems, offering easier onboarding and alternative verification methods [11] - Collaboration between financial institutions and tech companies is essential to bridge the trust gap and improve visibility into consumers' financial behaviors [15][16] Group 3: Rethinking Creditworthiness - Creditworthiness can be assessed through alternative data sources, such as mobile activity and transaction behavior, rather than solely relying on traditional credit history [14] - Financial institutions must adopt flexible trust models that utilize digital footprints to make informed lending decisions [16] - A redefined approach to creditworthiness can foster an inclusive financial ecosystem, benefiting both consumers and financial institutions globally [16]