The financial systems, and the world of credit, have long been ruled by processes that entrench inequality. Financial inclusion is stifled by the fact that lenders rely on outdated systems such as credit files and bureau credit ratings and scores. These processes may serve those with a thick-file well, but this leads to the exclusion of millions of people around the world.
Those with a thin file are left unable to access credit and miss out on the opportunities that exist for others. What does it mean to be a thin-file customer? And how can alternative credit decisions help?
The terms ‘Thin-file’ and ‘Thick-file’ are associated with traditional credit bureaus. The bureau score most people are familiar with today was introduced in 1989, this relatively modern tool is already outdated as our financial lives have changes dramatically in the last 30+ years.
A thin-file customer is one who has not previously accessed credit, or they have very rarely made use of it, or their credit history is not recent. This means that their file is classed as thin as it contains very little information about them. The traditional application process for credit means that these customers find it extremely hard to access credit.
A thick file shows how people have previously managed credit. This information allows lenders one way to mitigate risk by only lending to those who have shown an ability to manage loans in the past. With a thin file, there is less credit history to go on and so the obvious outcome is rejection.
Credit scores that only see part of the market limit the business of lenders, cutting them
off from many ‘good’ borrowers. While a financial institution may want to lend to those with little or no credit history, the incumbent legacy credit score system simply does not allow them to.
Those who find themselves left outside of financial inclusion are often there through no fault of their own. It is often just down to the point that they have reached in their lives rather than having had made any financial mistakes. Those most likely to have a thin file include:
Those who have perhaps just turned 18 or are in their early 20s may never have had the need to access credit before. They may well be secure jobs and earning a stable income, but if they have not previously utilized credit then they have no way of proving their creditworthiness.
Those who are later in life may have had a thick-file once upon a time. However, once their mortgage is cleared and they have retired, the need for credit becomes less. This can see their file thin out and make it difficult for them to get credit in the future.
There are an estimated 1.7 billion people across the world with no bank account. These people have thin files and find it impossible to access credit.
Those who have recently moved country may find their credit history does not follow them. In a new country they will find themselves starting their credit file anew.
Those with a thin file can be brought into the fold of financial inclusion by using alternative credit decision making processes. One example of this can be seen in character-based lending. This is a way of analysing a potential customer and identifying:
This approach allows lenders to look beyond a thin file and to identify those who make ideal customers. Given the millions of thin-file customers that exist, the potential market size here is phenomenal and gives lenders an extraordinary opportunity to expand and increase profits.