By Juan A. Ketterer
What is the most important thing that smart cities and smart banking have in common? Both need (and have managed to acquire) plenty of data to become smart. Without data to test how good your models are, nobody can learn and become smart.
Smart cities hold the key to improving access to finance for SMEs and unbanked individuals. Not only are they host to novel technological solutions for sustainable urban development, but they exemplify the power and pace of digital innovation and data.
Limited access to finance has traditionally resulted from the lack of perfect information about a borrower’s ability and willingness to pay. Solutions to this challenge have been to focus on improving the quality of data and requiring collateral. Nevertheless, these solutions have not only proven costly but also highly inefficient. Historical sources of information, including data furnished by the firm, data purchased from credit bureaus as well as data generated from bilateral transactions between the borrower and the lender, have delivered incomplete and/or untrustworthy information, still preventing small firms and individuals from accessing credit.
New convergent technological developments are challenging the status quo of the financial services industry and have led to new business models with the potential of improving access to finance. Thanks to expanded broadband access, the growth of cloud computing and the internet of things, among others, new sources of trusted and low-cost information are becoming available, facilitating the management of collateral and offering alternatives to access to market barriers.
For example, new-entrant market lenders with alternative intermediation models and advanced credit scoring techniques are challenging traditional incumbent banks and pushing the financial services industry toward lowering lending spreads. They are also expanding the set of bankable firms and individuals just as the use of e-commerce, e-payments, and other digital channels is allowing firms and individuals to create a credible and transmissible digital history or identity. New techniques and procedures to handle collateral, supported by blockchain-based registries, are also making the use of collateral more efficient, cheaper, and more secure, further transforming the industry.
With the ability to gather and analyze massive amounts of data, smart cities like Busan are now creating an ideal environment to improve financial inclusion and to implicitly increase formalization and productivity of businesses. As information on energy consumption, traffic patterns, waste disposal, social media interactions, phone record etc. becomes available, artificial intelligence-based credit score engines can deliver more accurate credit assessments and further reduce asymmetric information between borrowers and lenders, thus facilitating access to financing.
Obvious hurdles – including regulatory challenges – arise with the introduction of disruptive technological advances and new business models. In this regard, The Connectivity, Markets and Finance Division of the Inter-American Development Bank is committed to leading the effort to adopt regulatory frameworks and public policies that assist Latin American and Caribbean countries to transform their ecosystems into smarter places able to improve financial inclusion.
The pace of innovation is inevitable and the power of data unstoppable. The potential of smart cities is thus endless and can improve the lives of many of those who remain underserved in the financial sector.
Juan Antonio Ketterer is currently the Chief of the Connectivity Markets and Finance Division of the Inter-American Development Bank (IDB)