Psychometric testing on the rise in emerging markets

A mini-boom in psychometric testing is improving financial inclusion in emerging markets, providing an alternative for loan applicants who do not have traditional credit records.

Services offered by companies such as VisualDNA, a psychometric testing company in London and Entrepreneurial Finance Labs (EFL), a US firm spun out of Harvard University, are helping to bring banking services to the "unbanked".

Schemes are up-and-running in Peru, India and other countries in Latin America, Africa and Asia.

"We are doing something completely different that is actually a sensible way to evaluate risk," says Bailey Klinger, the Lima-based chief executive officer of EFL Global.

EFL says lenders using its screening tool have shown up to a 50 per cent reduction in default.

In one example, Indian microfinance company Janalakshmi Financial Services (JFS), uses the test to lend to rural migrant women who need capital to set up small businesses.

Although the women have no bank accounts, collateral or verifiable home address, the test allows JFS to assess lending risk, says Narayana Rajan, a senior executive. He adds that those who score in the bottom quartile of test respondents were nearly 2.5 times as likely to fall behind on their repayments as customers in the top quartile.

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For Maribel Sierra, a small merchant in Lima, the service enabled her to rebuild her business after a fire reduced her street stall to ashes. "I was left without merchandise, with nothing but debts," she says. "But then through a questionnaire I was granted a loan, and thanks to that I was able to start again."

Her questions included how she dealt with problems. Her reply was: "Never give up."

So, how do the tests work? They aim to assess the creditworthiness of applicants by revealing personality traits with a series of subtle questions that have no obvious "right answer".

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VisualDNA's test uses an online quiz that asks respondents to choose a photo from a selection. For example, potential answers to the question, "how do you respond to bad news?" include photos of a pressure cooker, a rope about to snap, a rubrics cube and a maze.

Even though it may seem obvious that a loan applicant trying to make a positive impression would likely choose the rubrics cube over the fraying rope, Clare McCaffery, head of the credit and risk business at VisualDNA, says "gaming" the test is difficult because of algorithms that judge consistency of replies across five character traits.

<>The VisualDNA test is based on the "Ocean" classification of personality types, which highlights traits such as openness, conscientiousness, extraversion, agreeableness and neuroticism. Another level of defence against applicants tailoring their answers is the picture-based options.

"The use of pictures makes it less obvious what the right answers are," Ms McCaffery says. "By using pictures you elicit a more intuitive response."

So far, VisualDNA's technology is being used in South Africa, Russia, Poland, Turkey, the Czech Republic, Slovakia and the UK, with some 150,000 people having taken the quiz in the 18 months since operations started. The company plans to move into India, Brazil and countries in sub-Saharan Africa over the next two years - aiming to provide about 2.8m tests.

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