Traditional credit scoring methods have long been a barrier to financial access for young professionals in Southeast Asia. These methods, primarily based on payment history and the number of existing credit accounts, inherently favour older individuals with established credit histories. Therefore, young people, who often lack these historical records, find themselves at a disadvantage, despite their significant earning potential and increasing economic influence in the region. This scenario has created a financial environment where access to essential credit products, such as credit cards, remains limited, stifling broader financial growth and inclusion.
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In countries like The Philippines, the impact of this outdated system is stark, with only 8% of the population possessing credit cards. Traditional financial institutions continue to cater to this small percentage, offering multiple credit products to the same individuals while neglecting the vast majority who remain credit-invisible. This lack of access to basic credit products can have long-term repercussions, hindering the ability of young professionals to secure home loans, business loans, and other crucial financial services that are pivotal for personal and economic development.
Recognizing this profound challenge, Zed, a pioneering financial institution, has emerged with a mission to transform the credit landscape for the next generation. The goal is to create a fairer, more inclusive credit system that acknowledges the unique circumstances and potential of young Southeast Asians. This addresses the immediate need for better credit access as well as paves the way for a more equitable financial future.
In this interview, we speak with Steve Abraham, co-founder of Zed, about the traditional credit scoring challenges faced by young professionals in Southeast Asia, the motivations behind Zed’s mission, and the innovative strategies they are implementing to overcome these hurdles. Abraham shares insights on the adaptation of Silicon Valley methodologies to the Southeast Asian market, the significance of Open Finance, and the plans for Zed’s expansion in the region.
Can you explain how traditional credit scoring methods have impacted the financial opportunities available to young professionals in Southeast Asia?
Credit scores are inherently backward-looking because they index on payment history, the number of other credit accounts, and the age of those credit accounts. This is all valuable information, but the fact that your score overweights these features means that it’s strongly correlated with applicant age.
Young people often have low or no scores, simply because they haven’t had time to build histories. And credit scores ignore critical information like income and earning potential. This is exactly what this next generation of Southeast Asians has in spades, as they increasingly become the primary economic force in the region.
The fact that Mark Zuckerberg and I have comparable credit scores because we both have roughly the same length of positive payment history makes no sense at all. He has more earning power than I have by orders of magnitude.
The result of all this is that, in the Philippines, only 8% of the population has credit cards. And traditional issuers are busy chasing that same 8% to give them their second, third, fourth and even fifth cards – because they’re the only ones with scores in credit databases.
The inability to access basic credit products like a credit card early on in your financial journey ultimately shuts you out from accessing life-changing financial services in the long term – home loans, business loans, and certain investment products.
What motivated you to tackle this issue?
The scale of the problem / unmet need is massive. There are approximately 490 million Southeast Asians under the age of 40, and only 8% of people in the Philippines, 6% in Indonesia and 2% in Vietnam have credit cards.
We’re at an inflexion point. There is a once-in-a-lifetime opportunity to break the mould of what traditional financial services offer and meet the needs of the next generation in this region as incomes rise and unprecedented numbers enter the middle and affluent class. We believe that young people deserve both better access and a better experience with credit.
What are some of the things you brought from Silicon Valley that translated well in Southeast Asia? What were some of the things that don’t quite work the same?
My co-founder Danielle is a Designer and I am an Engineer – so being laser-focused on building a product that solves a very specific problem and delivering the best user experience is in our DNA. We have a strong point of view on what the credit card for the next generation looks like, and we are shipping first-to-market features that deliver on that vision.
An area we believe Zed will be instrumental in pushing forward in the region is Open Finance. Seamless and secure sharing of account data and interoperability among financial institutions comes more easily in the US with the ubiquity of services like Plaid and in Europe and Australia where Open Banking is codified into law.
The specific problem we are solving – improving the next generation’s access to credit – is a direct result of how siloed bank data is in this region and the consumers’ inability to leverage their own financial history to select and access better financial services. Customers are locked into their current banks, regardless of the quality of their products and services. We believe Zed will serve as a clear example of how unlocking financial data provides a game-changing benefit to consumers and will increase awareness of the value and necessity of supporting Open Banking.
What challenges did you face in designing a credit scoring model that is both fair and secure, and how did you overcome them?
Ensuring the veracity and quality of data we put into our credit models is critical to delivering on our income-based underwriting approach. To do this, we made an intentional decision to leverage Open Banking solutions that allow us to directly gather the data needed in our application process from the source, as opposed to falling back on traditional methods that require users to submit various documents that may not be authentic.
We’re continuing to fine-tune our credit and risk models, which means that we have to focus on onboarding users at a very methodical pace. As these models develop, refined and retrained on observed default data, we can get more and more aggressive about issuing cards. Unfortunately, that means, occasionally, we’re also forced to turn away certain applicants with stellar profiles that would likely have been approved in 6-12 months. So we’re asking for the market’s patience with us as we roll out Zed to serve all the people that we started Zed to serve.
What are your expansion plans beyond the Philippines, and how do you plan to address the shared challenge of inaccessible credit products across Southeast Asia?
We see a significant opportunity in credit cards in the Philippines, so our focus is on our rollout to the 50,000+ people on our waitlist before anything else. That said, this same problem for young professionals exists at scale across the region. We’ll be considering the right time to expand, we’re well positioned given that we’re a standalone Financial Institution licensed by a central bank in the region.
What’s next for Zed?
What’s most important for Zed is rapidly fine-tuning our risk models, scaling operations and support rolling out to our 50k waitlist, and continuing to deliver first-to-market features.
We’re focused on profitability, which means fine-tuning our risk models and delivering the best possible customer experience, which will lead to highly engaged users delivering the most value back to Zed.