Smartphones can dramatically reduce the cost of lending, experts say, because the apps they run generate huge amounts of data—texts, emails, GPS coordinates, social-media posts, retail receipts, and so on—indicating thousands of subtle patterns of behavior that correlate with repayment or default. This is a game changer in the microlending space, allowing borrowers in emerging markets immediate access to loans at far lower interest rates. As the growing number of smartphone users in those regions rises, so will the access to data and use of such nontraditional data sources to assess risk.
These lending startups build on the popularity of mobile banking in many developing countries and the rapid rise of smartphone use. A Pew Research Center report from April shows that 34% of South Africans, 27% of Nigerians and 15% of Kenyans already own a smartphone. Customers of Branch and InVenture in Nairobi, Kenya, said they used the loans to pay for running or improving small businesses. Some had access to banks but felt the smartphone interest rates were better; others had been borrowing informally from neighbors at high interest rates.