The most transformative information innovation is the rise in the use of new types of data from the digital footprint of customers’ online activities—majorly for credit-worthiness analysis. Credit scoring leveraging so-called hard information is nothing new. Usually, the more data is available, and the more precise is the evaluation. But this means has two problems. First, hard information tends to be procyclical: it accelerates credit expansion in good times but exacerbates contraction during downturns. The most complex problem is that certain kinds of people, like new entrepreneurs, innovators and many informal workers might not have enough hard data available.
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Fintech resolves the dilemma by tapping several nonfinancial data: the type of browser and hardware leveraged to access the internet, the history of online searches and purchases. Latest research documents that, once fuelled by artificial intelligence and machine learning, these alternative data sources are often superior to conventional credit assessment methods. They can innovate financial inclusion by enabling more credit to informal workers and households and rural areas.
Technology again accelerates an existing trend. The shift from in-person bank branch visits to remote, online communication enhances customer convenience and makes financial intermediation cost-efficient. It also accelerates geographic competition among banks, which can now service distant customers. The impacts of digital transformation are potential for the financial sector, already the industry most heavily reliant on computers.
That growth ability ensures that digital innovation in data and communication is bound to deepen even further and give rise to priorities in many policy areas. Prudential regulation faces perhaps the most substantial hurdles. Regulators must evaluate the operational risks of resulting in technologies and business models facing their first real-life stress test during the COVID-19 downturn.
