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Geolocation Data
Discover how geolocation data can be utilized to assess credit risk and enhance digital credit scores.
Discover how geolocation data can be utilized to assess credit risk and enhance digital credit scores.
The location of borrowers has a direct impact on their risk level and digital credit score.
For example, regions with high unemployment rates have a higher risk of default. After all, it can be assumed that the applicant will lose their job and be unable to make payments.
With residents of economically developed jurisdictions, the situation is the opposite. They have a better chance of having their application approved.
In addition, geolocation data provide lenders with many insights beyond just economic indicators. This makes them indispensable in credit risk management.
Geolocation data is information obtained from a user's device that allows inferring the user's location.
Such information may include:
Collecting such information allows lenders to track the borrower's location. Based on this, they can create a digital credit score for the borrower and decide whether to lend to that applicant.
Industry research reveals significant differences in borrower behavior even within the same country.
1. According to Forbes, credit card delinquency rates vary in every state in the U.S. It ranges from 6.65% in Minnesota to 12.95% in Nevada.
2. The same situation can be traced in Mexico. Here, the different default rates can be seen by city. According to FINCA analysis, in Cordoba, San Andres Tuxtla, Leon, and Coatzacoalcos, more than 60% of borrowers default.
In other cities, including Puerto Escondido and Oaxaca, the number of defaulters does not exceed 12 – 13%.
3. Another illustrative state is India. The number of consumer loan delinquencies in the country varies by type of locality.
According to FACE data, in cities with a million inhabitants this indicator barely exceeds 3%. Whereas in rural areas it is more than 4 percent.
All these facts make it reasonable to use location analysis to evaluate a potential borrower.
Information about the applicant's location allows the lender to give an objective assessment of the applicant. Specifically:
1. Compare geolocation data with the information provided in the loan application. A mismatch of data is a reason for establishing a high level of risk for the borrower. After all, the deliberate indication of false information may indicate fraud.
2. Take into account the specifics of the borrower's place of residence. The lender will receive data on the level of default, unemployment, and crime in the region, the quality of life of the population, etc.
The accurate location of a person is possible through IP lookup solution. It is offered by some alternative data provider.
The process of collecting and analyzing geolocation data takes place in several steps.
Step #1. Providing information about the borrower to the alternative data provider. The required information includes:
Step #2. Geocoding and reverse geocoding. Geocoding is determining the borrower's coordinates.
Reverse geocoding is the search for accurate information about the borrower's location. Knowing the coordinates of the applicant, the lender can determine where exactly the receiver is located. For example, in a private home, an organization, a hospital, a prison, etc.
Step #3. Evaluation of the obtained data. At this stage, the credit organization can compare the information received with the information provided in the application. Any discrepancies should be taken into account when deciding whether to grant a loan.
Step #4. Regional analysis. In addition to the level of defaults in the country and city where the borrower lives, it is important to take into account other aspects. These include:
The lender should take into account all the data obtained in its credit scoring model. This will improve credit performance and bring other benefits.
Tracking geolocation data and IP analysis for credit risk management allows a lending organization to:
1. Reduce the number of fraudulently originated loans.
2. Increase customer base by lending to the unbanked population.
3. Decrease default rate by identifying potential defaulters at the loan application stage.
Geolocation data is the location information of a digital device and an important source of non-traditional data. It is key to credit scoring because it allows the lender to objectively evaluate the applicant.
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