In Mexico, a pioneering company uses sophisticated data sets to replace credit scores and provide access to mobile phones and the internet.
After two years of intentionally losing money in a very smart way, a Mexican cell phone company is set to change the way the country’s consumers use mobile phones to access the internet. If their plan works, it could transform not only the Mexican phone industry, but consumer finance systems in developing countries around the globe.
When you bought your cell phone, you might have earned a few hundred dollars in discounts in exchange for the promise of sticking with your carrier for two years. Those shackling cell phone contracts might seem like a hassle, but they’re a first-world luxury. Mobile plans that bill you later, rather than forcing you to pay upfront, end up saving you money and making your life easier.
“When you're 35 years old, you have a job, you have a family, being on prepaid and running out of minutes in the middle of a conversation, or not having access to a data plan because you're buying megabytes on a one-off basis at the convenience store, can be a huge deterrent,” says Gabriel Manjarrez, CEO of Mexican cell service provider Micel.
A prepaid plan is essentially a loan from the cell phone company to the user—the company provides airtime now if the user promises to pay it back later. But that only works if the phone company is confident it'll be paid back. Mexican phone companies have a difficult time maintaining that confidence because 85 percent of Mexicans don’t have a credit card or the kind of payment histories that make for a good credit score. Consequently, 85 percent of Mexican cell phone users have prepaid accounts without consistent search access.
To get a credit card, you often need a credit card. That's a non-starter for most Mexicans, especially those working in the informal economy or without a history of paying bills under their own name—TV companies won't install a cable box for someone without a credit card, for example. Those who do have a credit card often pay twice the interest rates for the same card as an American would, so even some who would be eligible don't enroll.
“Not having a credit card becomes a tax on people,“ Manjarrez says. “So what we've done is we went to the carriers and we said, ‘You don't actually need a credit card in order to give someone a post-paid plan. What you need is someone to guarantee that person's payment.’"
Micel buys time from cell carriers and resells it to clients who can't otherwise get a contract. The company only uses Android smartphones with data plans, and many of their customers are getting consistent internet access for the first time. Forty percent of clients don’t have email addresses when they sign up, so a Micel agent must talk them through setting up a free webmail account, like Gmail or Yahoo. “It’s like our customers are living in 1996,” Manjarrez says.
Helping them get to 2012 can have a real impact on their lives: One study found that in Brazil, giving people access to internet search increased their personal GDP by 0.5 percent, largely by helping them find cheaper goods and services more efficiently.
In lieu of a credit history, Micel performs a customized background check, a system that could point to the solution for all kinds of industries and billions of consumers worldwide. The company piloted its method for the last two years, using investment funding from socially minded venture capital firms like the Omidyar Network to give cell phone plans to Mexicans with no credit history. The company is tolerating early losses in order to build a predictive data set it hopes will replace traditional credit scores for people who have never borrowed money. “The best way to understand whether somebody will pay you is by putting them in the position to pay you, and then seeing if they do or if they don't,” Manjarrez says of his gamble.
Micel, originally called Finestrella, collects heaps of data on each user—everything from personal information to user feedback. Manjarrez and co-founder Pedro Zayas, an MIT-trained computer scientist, asked questions about customers’ employers, who they live with, how many children they have, where they live, and more. “This is true big data play,” Manjarrez says. “Plus we gather outside data. So we go into social networks and gather data from them.”
But his customers aren’t on Facebook, so when Manjarrez says social networks, he means real life. Micel agents call up customers’ neighbors, school friends, even mothers-in-law. “You would be surprised how many people will give you a phone number of someone and then that someone will say, 'No I don't recommend them, he owed me money and he didn't pay me back,’" Manjarrez says.
Micel also taps publicly available datasets, then combines all the information in an algorithm designed by Zayas to produce a credit score for someone without a credit history—a potential gold mine considering how many new customers the model could create for the banking, credit card, and phone industries, among others.
“We reject about 40 percent of the people” who apply, Manjarrez says, noting that’s down from 70 percent. “Our defaults have gone down significantly.” Micel is still losing money, but Manjarrez expects to turn the corner into the black this year, and then consider expansion into other industries.
“Banks are very happy that we exist,” Manjarrez says, fully aware that if his smartphone plan works, he’ll be in position to help finance a large swath of Mexican consumers.
Image courtesy of Micel.mx