From buy now, pay later (BNPL) to credit card installments, there are diverse credit and lending products available to consumers today. However, for two-thirds of the world’s population, particularly in emerging markets, access to formal credit can be extremely challenging, if not impossible, says Kunal Kaul, chief risk and strategy officer at Tala.
The main issue, according to Kaul, is that legacy financial institutions often rely on traditional indicators such as credit scores or bank statements to assess creditworthiness — indicators that millions of low-income, emerging-market populations who are juggling multiple small jobs are incapable of providing.
“What we have found is that these customers don’t fit in the box. They don’t fit within the lines of what traditional institutions look for. They may not have a credit score. If they have a credit score, they might barely have any credit history,” Kaul told PYMNTS in a recent interview, pointing to the impact of irregular income patterns on formal credit access.
Against that backdrop, he said Tala’s microcredit product has been key to bridging the credit gap for underserved populations in countries such as Kenya, the Philippines, Mexico and India, giving them access to loans that average between $80 and $100 to cover short-term needs such as restocking a store or assisting a family member in need.
Basically, customers are offered a straightforward deal: a single fee for up to two months of borrowing, with no hidden fees, no compounding interest, and no refinancing options to trap them in a cycle of debt. “And if you’re late [in paying], there’s just one late fee, that’s it. There are no other late fees and interest that keeps accruing forever,” Kaul said.
Beyond Tala’s innovative use of data and machine learning (ML) to assess creditworthiness, Kaul said the fact that its loans are unsecured and only backed by the borrower’s creditworthiness rather than by any collateral such as property is the reason why creating value for customers is non-negotiable.
“This is not lending against a television or something else that you can take back from the customer,” he pointed out, “so inherent in the business model is that you only get repaid if you create value for the customer because there is no other resort we have as it’s not collateralized.”
So far, he said the company’s responsible lending practices and ensuring transparent pricing has not only empowered customers to make informed financial decisions, but has been critical to keeping repayment rates at over 90% globally. Additionally, the digital lender has lent $4 billion to customers in underrepresented markets to date and carries out $200 million transactions each month.
Looking ahead, Kaul said the future of the microcredit landscape looks promising for providers like Tala due to the integration of artificial intelligence (AI) and ML to customize lending offerings. Then, there are the opportunities presented by evolving data privacy regulations and consumer protection laws to separate trustworthy lenders from those who may engage in less responsible practices.
“Most legitimate players we talk to in the industry are very excited about these changes,” he said. “They help protect consumers. They clean up the industry practices, and that’s always a good thing in the long run.”