credit | March 1, 2018

Alternative credit scoring, direct investing in Philly, reducing investor bias

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Greetings, ImpactAlpha readers!

#Featured: ImpactAlpha Original

Forget FICO: How alternative credit-scoring is driving financial inclusion around the world. Fintech startups are crunching call-logs, app installs and even punctuation to help more individuals and businesses get loans. The World Bank estimates that two billion adults do not have a bank account, let alone a FICO or other score rating their creditworthiness. In the US, 45 million people do not have a credit history. With hundreds of millions of potential customers, loan providers have begun to pay attention, and a raft of alternative credit-scoring startups are ready to help them.

When you turn to big data for solutions, you get some unexpected answers. What time of day does a potential borrower make most of her calls? If she places fewer than 30% of her calls between 9pm and midnight, her odds of repayment increase by 18%. If she has more than 23 social media applications, she is 20% less likely to repay. With fewer than 10, her repayment rate increases. Listing first and last name with capitalization suggests an attention to detail and thus a propensity to repay, found Tala, a data-science startup that uses more than 10,000 data points to construct financial identities for people without traditional credit history. “In the Philippines, we found that zombie racing games were an indicator that someone was a little bit less trustworthy,” says Tala’s Lauren Pruneski.

“Fintech for alternative credit scoring is a big area for us,” Tahira Dosani of Accion Venture Lab, tells Rob Goodier, editor of Engineering for Change, who partnered with ImpactAlpha’s Jessica Pothering to explore the new credit-scoring algorithms.

Read, “Forget FICO: How alternative credit-scoring is driving financial inclusion,” by Rob Goodier with Jessica Pothering.

Forget FICO: How alternative credit-scoring is driving financial inclusion

#Dealflow: Follow the Money

Goodwell’s Umunthu fund backs Nigerian fintech provider Oradian.Oradian helps microfinance institutions reduce operating costs and cope with intermittent Internet connectivity as well as storms, floods and fires. From northern Nigeria, Oradian has expanded to seven African countries with more than 50 clients that serve more than a million customers. The amount of Goodwell’s investment was not disclosed. In January, Amsterdam-based Goodwell, which backs young, inclusive fintech companies in Africa and India, announced it had raised $24.5 million for its $100 million Umunthu fund.

Entrepreneurs from eight countries join Endeavor. Endeavor connects high-growth companies with the potential to employ thousands of people to a global network of mentors, resources and customers. At its Dubai event, the network selected entrepreneurs from more than a dozen firms in Argentina, Ecuador, Indonesia, Jordan, Spain, South Africa, Tunisia and the United Arab Emirates to join its network. AWOK, in Dubai, is an online shopping network targeting the city’s low-income customers with affordable, quality goods. Little Thinking Minds and Hello World Kids, both in Jordan, provide language and coding training for youth, respectively. i-Pay, with offices in Cape Town and Johannesburg, is a payments platform serving the South African and Nigerian economies.

See all of ImpactAlpha’s recent #dealflow. Send deal tips and news to [email protected].

#Series: The New Revivalists

Daryn Dodson: Reducing investor biases to uncover latent value. A new era in the fight for economic justice is underway and Daryn Dodson is making his stand from within the United States’ asset management business, which he calls, “one of the most economically unjust places on earth.”

Of the $36 trillion in the North American asset management business, an estimated 1% are managed by firms owned by women and people of color. Dodson, founder and managing director at Illumen Capital, a Washington, DC-based private equity firm says the omission of women and people of color is unjust and means mainly white, mainly male investors are missing opportunities in plain sight. Even impact investors, says Dodson, are putting money into educational technology, financial inclusion, clean energy and other high-impact sectors without considering implicit biases that may exclude people of color and women.

“They’re hurting the impact and the returns of their portfolios without even knowing it,” Dodson told Megan McFadden, for ImpactAlpha. Illumen Capital has partnered with Stanford University and leading researchers to develop evidence-based trainings to help fund managers overcome implicit biases and find hidden value. Read, “Daryn Dodson: Reducing investor biases to uncover latent value,” by Megan McFadden on ImpactAlpha.

New Revivalists is a series from ImpactAlpha and Village Capital profiling the people, places and policies reviving entrepreneurship — and the American Dream.

Daryn Dodson: Tackling investors’ racial and gender biases to unlock hidden value

#Featured Event: Total Impact Conference in Philadelphia, April 26–27

Direct impact investments into Philadelphia businesses and nonprofits.The Untours Foundation, located outside of Philadelphia, has made $4 million in loans and equity investments into dozens of local green, fair trade and B corporation-certified businesses. “Banks will not touch this crop of generous, hardworking, super creative entrepreneurs, so the Untours Foundation and angel investors have them largely to ourselves,” Elizabeth Killough, the foundation’s director, writes in ImpactPHL Perspectives, a multi-part series exploring Philly’s impact economy. Untours was the first investor in Wash Cycle Laundry, a bicycle-powered laundry providing job opportunities for formerly incarcerated people. Untours was an early investor in Equal Exchange, a 30-year old Fair Trade cooperative with $70 million in annual sales.

The Total Impact Conference, from Good Capital Project and ImpactPHL, will feature impact investment opportunities, along with tools and insights for advisors, families and investors. Join ImpactAlpha in Philadelphia, April 26–27. Use code TI_ImpactAlpha and register here for a $300 discount. ImpactAlpha is the conference’s media sponsor.

#Signals: Ahead of the Curve

At the FLII, impact investors tackle the “how.” Discussions at the eighth Foro Latinoamericano de Inversión de Impacto in Merida, Mexico are revolving around not why or what or when, but how. Here are some highlights:

  • Impact investment need not be pure. There are steps on the path towards impact, says Andrea Armeni of Transform Finance and Aner Ben-Ami of Candide Group. BlackRock’s warning to global CEOs could mean serious change, says Armeni. “But I am not going to talk to Larry Fink about being non-extractive.” The important thing, he says, is to take people where they are and work towards improvement.
  • The “how” would be easier for US development finance with equity.Legislation in the US Congress could restructure development finance. The US Overseas Private Investment Corp., unlike most global development finance institutions, can offer only debt, not equity. That leaves “a perception that it still isn’t equally shared risk [with other partners],” says Jaime Ramirez of Grassroots Business Fund. OPIC’s David Bohigian told ImpactAlpha the ability to make equity investments would make the US a more catalytic investor.
  • Investors need to stick with entrepreneurs. Too often, investors make one investment or issue one loan and move onto a shiny new thing. That’s not the path to meaningful change, says Beneficial Returns’ Ted Levinson. “Social entrepreneurs are addressing massive problems, but they’re tiny. Investors should double down on the ones that work.”

Thank you for reading. Onward! Please send news and comments to [email protected]