Fintech companies are using alternative data to create new credit-scoring systems, expanding access to credit and fostering economic empowerment despite privacy and regulatory challenges
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This article is a part of the essay series: “The Freedom to Know: International Day for Universal Access to Information 2024”
In India, financial inclusion remains a critical and unresolved issue, with a significant portion of the population excluded from formal banking services. Traditional credit systems, anchored in rigid, conventional data points, have sidelined individuals without established credit histories, creating an inherent barrier to financial access. But as the digital age brings forth a tidal wave of accessible data, fintech innovators are beginning to rewrite the rules. By leveraging alternative data sources—such as utility payments, mobile phone usage, and social media activity—these companies are developing new credit-scoring models that democratise access to credit. Access to information sits at the very core of these transformations, and when harnessed effectively, it becomes the driving force behind groundbreaking innovation and profound social change.
By leveraging alternative data sources—such as utility payments, mobile phone usage, and social media activity—these companies are developing new credit-scoring models that democratise access to credit.
The real essence of innovation lies not just in the availability of data, but in how it is leveraged to drive social equity and economic empowerment. However, this transformation brings its own set of challenges, with ethical concerns and data privacy standing at the forefront. The journey ahead is filled with hurdles, but the potential for creating a more inclusive financial system is equally vast.
Alternative credit scoring leverages non-traditional data sources—such as utility payments, mobile transactions, and even social media activity—to assess an individual’s creditworthiness, stepping away from conventional credit reports. By analysing digital footprints, fintech firms open up financial opportunities for those excluded from formal banking systems. In India, the need for alternative scoring is pressing, as many remain “credit invisible” due to informal work and lack of documentation. Without access to traditional loans, people often turn to predatory lenders, perpetuating financial instability. This shift not only democratises credit access but also paves the way for broader financial inclusion in emerging economies like India.
According to the Global Findex Database 2021, only 35 percent of adults had a bank account as recently as 2011, highlighting the long-standing barriers to financial access. The Reserve Bank of India's (RBI)Financial Inclusion Index (FI-Index) reflects gradual improvements, rising from 56.4 in 2021 to 64.2 in March 2024. This persistent gap underscores the urgent need for alternative credit scoring models that can democratise access to financial services for those currently excluded from formal banking systems.
Without access to traditional loans, people often turn to predatory lenders, perpetuating financial instability.
Alternative credit scoring in India, though still in its nascent stages, is gaining traction. Lenders, instead of relying solely on conventional credit scores, can now access a wealth of consent-driven, unstructured data. This data is fed into platforms like CreditVidya, where AI and machine learning algorithms process it to assess credit risk, even when applicants lack traditional credit histories. Juvo is another organisation that leverages data from mobile user behavior to create proprietary credit scores. These scores unlock new financial opportunities for individuals who lack formal credit histories, offering them access to resources that were previously out of reach.
While alternative credit scoring offers a promising path toward financial inclusion, it raises important questions around privacy, data integrity, and regulation. The extraction of personal data—ranging from mobile transactions to social media activity—demands stringent safeguards to prevent breaches or misuse, particularly in a country like India, where data security is a growing concern. Moreover, the quality and reliability of this data vary, and when inaccurate, it risks creating lending decisions as erratic as the financial behaviour it seeks to capture.
Regulatory frameworks are struggling to keep pace with the rapid evolution of alternative credit in India, particularly due to the vast amounts of data being utilised. As the country navigates this emerging landscape, it is essential to establish clear guidelines that ensure fintech companies operate with transparency, protect consumer rights, and adhere to ethical practices.
The quality and reliability of this data vary, and when inaccurate, it risks creating lending decisions as erratic as the financial behaviour it seeks to capture.
Despite the rapid growth of fintech and alternative credit scoring models in India, there remains no dedicated regulatory framework governing this practice. Currently, the sector relies on broader laws such as the Credit Information Companies Act and the proposed Digital Personal Data Protection Bill, 2022 for guidance. While these laws provide some oversight regarding data usage and consumer protection, they do not specifically address the nuances and challenges unique to alternative credit scoring.
For example, the Reserve Bank of India's Working Group on Digital Lending Report (2021) raised concerns over fintech providers processing large volumes of consumer data without proper consent. The Digital Personal Data Protection Bill proposed safeguards around the collection, storage, and sharing of data, but as alternative credit scoring models evolve, there may be a need for more tailored regulations. Such regulations would ensure transparency, ethical practices, and better consumer protection in the growing digital lending landscape.
A key trend moving forward could be increased collaboration between fintech companies and traditional banks. However, a potential first step may involve banks experimenting with these models internally. For instance, Axis Bank has already begun testing this approach to improve its underwriting models. By combining innovative strategies with conventional banking practices, these efforts could better address the needs of unbanked populations.
The Digital Personal Data Protection Bill proposed safeguards around the collection, storage, and sharing of data, but as alternative credit scoring models evolve, there may be a need for more tailored regulations.
Technological advancements, particularly in AI and machine learning, will refine these alternative credit models even further, offering increasingly accurate risk assessments while streamlining the lending process. Finally, as fintech matures, a growing emphasis on financial literacy will become central to ensuring that the newly financially included understand their rights, responsibilities, and the long-term implications of borrowing. It is not just a technical revolution, but one that requires educating, informing, and empowering citizens.
For many individuals, these new avenues of financing provide the tools to overcome systemic barriers that have long constrained their financial aspirations. Traditional credit assessments often rely on rigid metrics that fail to capture the full picture of a person's financial behaviour and potential. In contrast, fintech solutions utilise a range of data—from payment histories to social media activity—offering a more nuanced understanding of an individual’s creditworthiness.
This shift has profound implications for economic empowerment. By recognising the value of digital footprints, fintech firms are not only enabling greater access to funds but also instilling a sense of agency in those who have been overlooked by traditional systems.
With stronger collaborations between fintech disruptors and traditional banks, India stands at the cusp of creating an inclusive financial ecosystem, where all citizens, regardless of their backgrounds, can engage fully in economic life.
This rethinking of creditworthiness reshapes financial narratives, shifting the focus from a simple assessment of risk to a more meaningful acknowledgement of economic potential. It facilitates innovation and supports entrepreneurship, contributing to a more inclusive financial landscape where individuals are seen for their capabilities rather than being limited by past exclusions. This change reflects a pragmatic shift in how society evaluates economic contributions, offering new opportunities for those who have previously been overlooked.
As the evolution of technology accelerates and regulatory frameworks catch up, the possibilities for these alternative models will only expand. However, it is not without its challenges. Data privacy and the reliability of information are two major concerns that need addressing. Yet, with stronger collaborations between fintech disruptors and traditional banks, India stands at the cusp of creating an inclusive financial ecosystem, where all citizens, regardless of their backgrounds, can engage fully in economic life. This is not just about access to credit; it’s about reconfiguring the economic agency at its core and how data can play an important role. The foundation of these advancements is rooted in access to information. When used wisely, it has the power to spark transformative innovation and catalyse meaningful social change.
Sauradeep Bag is an Associate Fellow at the Centre for Security, Strategy, and Technology at the Observer Research Foundation.
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Sauradeep is an Associate Fellow at the Centre for Security, Strategy, and Technology at the Observer Research Foundation. His experience spans the startup ecosystem, impact ...
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