June 23, 2020

“A New Era for Credit Scoring: Financial Inclusion, Data Security, and Privacy Protection in the Age of Digital Lending”

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Cover of "A New Era for Credit Scoring"
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The Center for Long-Term Cybersecurity (CLTC) has published a new report, A New Era for Credit Scoring: Financial Inclusion, Data Security, and Privacy Protection in the Age of Digital Lending, that examines the trade-offs associated with digital lending platforms in India. By providing small loans to consumers through their mobile phones, lending apps have broadened access to credit for low-income borrowers. But they have also introduced new threats to fairness, privacy, and digital security, as lenders use an array of personal data — including age, location, and even personal contacts — to gauge an individual’s willingness and ability to pay.

“Digital lenders in India can (and do) use data points as far-ranging as individuals’ GPS location history and phone contacts as proxies for financial responsibility,” wrote the report’s author, Tarunima Prabhakar, who undertook her study while serving as a research fellow with CLTC. “These personal details are also in some cases leveraged in debt recovery, as some lenders contact borrowers’ friends and families to pressure them to repay debts. Alternative lending enables people to access credit, but with far fewer safeguards than traditional banks would provide.”

To develop the paper, Prabhakar analyzed industry reports, academic papers, and government publications, and she conducted interviews with stakeholders in the emerging “fintech” sector, including data scientists and venture capitalists. She also used text-mining techniques to analyze a corpus of 70,000 comments from lending app users, revealing that many of those who sign up to receive loans are unaware how their mobile phone data will be used.

Prabhakar’s paper compares the emerging digital lending industry in India with the example of the United States, where financial lending is regulated through laws such as the Fair Credit Reporting Act and Equal Credit Opportunity Act, which prevent lenders from making loan decisions based on factors like race and gender. Discrimination is a major concern with lending apps that rely on “alternative data,” particularly as decisions may be made by algorithms with limited transparency or accountability.

“The rise of digital lending — and more specifically, alternative credit scoring in India —provides a useful framework for considering the social and ethical consequences of algorithmic decision-making more broadly, and highlights trade-offs that governments and institutions must consider in weighing factors such as privacy and fairness against access to credit and other social goods,” Prabhakar wrote.

The report aims to help inform policymakers and financial industry leaders around the world who may be confronted with new risks and opportunities as the fintech sector evolves.”Lenders (and their regulators) should leverage the power of technology to expand access to credit, but should be wary of enabling lenders to violate borrowers’ privacy or allowing potentially discriminatory practices,” Prabhakar wrote. “The example of India highlights how, in an emerging economy with relatively weak institutions and low financial literacy, credit scoring through alternate data creates the possibility for rapid progress in financial inclusion — but under weaker consumer protection standards. The constant threat of exposure of consumer information adds to the challenge, and there is as yet no silver bullet that can enhance financial inclusion without a significant decline in consumer privacy and transparency in lending decisions.”

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