Michael Turner is leading a national and global effort to dramatically increase financial inclusion by promoting the responsible use of regular non-financial payment and other data in existing credit risk assessment tools.
The New Idea
Traditionally, one builds a credit rating through credit card and loan payments. However, millions of people in the US lack those methods of building a credit history, and so lack access to capital. However, many of those people do pay other types of bills regularly and are very credit worthy. The idea of gathering that other bill paying data and using it to determine credit worthiness is not new. However, in the decades since its inception, no one has managed to use it to get true access to capital markets for the unbanked---until Michael. Only Michael’s SDI initiative has been readily accepted by those who must buy in for it to succeed---namely, the large credit bureaus, as well as banks and governments. What is different? Rather than finding new ways to assess the unbanked for their credit worthiness, Michael is using and improving upon methodologies that are already in place for extending credit. By using alternative data and additional qualifying information (e.g. mobile phone and utility bills) that is readily available, and getting the bureaus to make this a part of the regular credit profile (rather than a separate rating scale), Michael is recasting the financially excluded in a different light. And because he has gotten the market (bureaus, banks, etc) to accept this, it is a financially self-sustaining solution.How has he done this? He has figured out what credit agencies and financial institutions want (because they are ever in need of expanding their client base) and how alternative data streams fit. Through Alternative Data Initiative (ADI), the existing credit agencies or banks pay for the data services and ensure they will use the outcome. At the same time, Michael is working with citizens’ sector organizations to help insure the protection of vulnerable populations.
In the United States, over 70 million people are excluded from access to the formal system of financial credit. This group is varied, and includes young people taking the first steps in their careers, recent immigrants, elderly divorcees and widows who previously accessed credit only through their spouses, ethnic minorities whose cultural norms and customs may strongly discourage buying on credit rather than from savings, immigrants who have not yet navigated the language barrier, low income earners whose credit needs are legitimate, and those who simply have not chosen to access the credit system for one reason or another. This lack of access most often means that they are subject to abuse and exploitation through usury rates and harmful practices by, for example, payday lenders. In addition, the lack of credit creates difficulties in building savings, being able to pay for medical emergencies, starting one’s own business, and makes it much harder to climb out of long-term, chronic poverty.The vast majority of those outside of the formal credit system lack credit data, such as a FICO score. Most low-cost lenders use this credit data to assess risk and underwrite loans. When this data is unavailable, they must use costly manual underwriting procedures, and so will usually automatically reject the applicant without the data. The excluded must therefore resort to high cost lenders to meet their credit needs. In the US, the burden on excluded households is estimated at $4.2 billion annually in fees. This high cost leads to exploitative behavior on the part of payday lenders and the informal sector and creates a huge burden on these households, many of whom are already dealing with the challenges of poverty.In the US, credit exclusion also overlaps with other forms of discrimination as the excluded include lower income households, younger populations, as well as the elderly, racial minorities, and recent immigrants. Outside of the United States, a similar problem exists. Although many developing countries do not have a system as formalized as FICO, the lack of available credit data prevents an efficient system of lending and leads to exploitation from the informal sector. Michael characterizes the issue as addressing the unbanked needs of “the missing middle,” or the populations (around the world) that are not banked but also have financial needs larger than those now being addressed in some communities through microcredit. Globally, the IFC estimates that this “missing middle” comprises 3.9 billion people.
The strategy is to give the unbanked a financial identity, and thereby include them in mainstream credit markets, by reporting, recording and analyzing alternative data sources. The premise of the strategy is that many groups, currently excluded from the existing credit reporting system, are good credit risks and have information available that indicate that.Rather than creating a new evaluation system, or inventing new metrics, Michael’s idea is premised on using existing data sources, increasing transparency and availability of such data, and integrating these existing data streams into the evaluation of credit agencies. Some examples of alternative data sources include: rental payments, utility payments, and other periodic payments. To address the use of alternative data, Michael has crafted a series of tools to enable the effective use (uptake) of alternative data. Through the Alternative Data Initiative (ADI) he is creating mechanisms to make alternative data streams more available and accessible for uses, similar to the way Datastream made economic data releases available to subscribers. In addition, through other activities of PERC he is creating research materials and position papers to assist policy agencies in making the decision to shift to alternative data. He is also working with foreign governments in Kenya, South Africa and China to help establish credit systems that include the large numbers of their citizens who have not had access to formal credit. Finally, an important component that Michael has recently integrated is working with existing citizens’ sector organizations to create support and understanding of the usefulness of alternative data in groups that represent the unbanked market. He is also very keen to create open source credit scoring models that could be accessed on the internet. This could revolutionize the credit industry and vastly level the playing field that is currently dominated by a few players. With the initial success of using alternative data in the United States, Michael has been invited to implement alternative data programs in developing countries, where credit bureaus and large-scale databases are not as widespread. The international efforts are in the early stages, but he is working on a demonstration pilot in Kenya to test the ideas in a developing market context.
Michael studied economics and public policy as an undergraduate and then went to Washington to work on the Hill as an idealistic Senate staffer. After experiencing the challenge of making real and sound changes to economic policy both on the Hill and with regulatory bodies in Washington, Michael was convinced that he would need to find or even create just the right systemic levers in order to implement real change. Unlike other entrepreneurs, Michael has not created a small scale project, seen it succeed in demonstration, and decided to spread globally. Instead, it appears that he studied the landscape and continued to refine his ideas, trying to find the most large-scale way to impact economic access for all who merit it.In 2002, Michael created his own organization, the Political and Economic Research Council, in order to directly shift policies and business practices through the use of alternative data. In the initial period, PERC operated somewhat like a research think tank, offering position papers and studies to influence other actors into incorporating their recommendations. However, given his understanding of the markets, and his considerable ability to see win-win solutions for all, he quickly molded PERC into a relationship and coalition builder (e.g. recently brought together TransUnion, DataStat, SAS and PERC to work on the use of payroll information in credit ratings). Not only has Michael shifted toward entrepreneurial activities (and away from purely-academic ideas), he has been reaching out to citizens’ sector groups to create a larger community of support for these efforts. He will continue to match these efforts with his efforts to get the bureaus and banks in the US to take up and implement alternative data. Michael is also becoming an expert abroad, sought out by developing country governments in Africa, the Middle East, South America and Asia to help them set up national credit bureaus.Michael likes to write short stories in his free time, and relax with his wife (who is a neonatologist, born in Sri Lanka) and their preschooler.