Psychometric testing companies VisualDNA and Entrepreneurial Finance Labs (EFL) are helping to bring banking services to the “unbanked” in countries where traditional credit scores don't exist.
“We are doing something completely different that is actually a sensible way to evaluate risk,” says Bailey Klinger, the Lima-based chief executive officer of EFL Global. EFL says lenders using its screening tool have shown up to a 50 per cent reduction in default. In one example, Indian microfinance company Janalakshmi Financial Services (JFS), uses the test to lend to rural migrant women who need capital to set up small businesses. Although the women have no bank accounts, collateral or verifiable home address, the test allows JFS to assess lending risk, says Narayana Rajan, a senior executive. He adds that those who score in the bottom quartile of test respondents were nearly 2.5 times as likely to fall behind on their repayments as customers in the top quartile.