Psychometric Testing: A Catalyst for Credit Appraisal at Financial Institutions

July 15, 2023

two people discussing bank partnerships

Alternative credit scoring models are the most widely used methods for assessing borrower risk in developing countries worldwide. They have various benefits for financial institutions, such as lower costs and increased credit assessment accuracy. Modern technology allows alternative credit scoring models to outperform inefficient, traditional models of credit scoring – those traditional models are becoming obsolete. Psychometric testing is one such alternative model. Psychometric testing is designed to objectively measure personality traits to assess a potential borrower’s credit risk. The biggest challenge encountered in assessing a potential borrower is determining their true intentions for seeking a loan. Many inexperienced borrowers find the purpose for which they originally took out the loan becomes subverted during the loan term, which is a major risk for creditors. The five C’s of credit list character as the most important factor in determining if a firm should approve a borrower. Psychometric testing can also help to meet the needs of millions of underserved clients who desire to enter an inclusive financial ecosystem but aren’t assessed as credit-worthy via traditional methods. Creditors need to modernize their credit assessment processes in order to provide financing to safe borrowers who would not otherwise be approved for lending.

Benefits of Psychometric Testing for Loan Administration

Psychometric testing for loan administration is a relatively new credit evaluation method that aims to improve accuracy in measuring a potential borrower’s likelihood of repayment. It helps to avoid the many pitfalls of using more traditional methods of credit assessment, such as the fact that traditional credit scores can be heavily affected by factors that don’t truly impact a borrower’s credit worthiness. Conventional assessment methods may be able to measure a potential client’s likelihood of repayment and their capacity to repay the potential debt obligation. What it cannot do is measure a potential client’s character and willingness to pay. Though a borrower’s character is influenced by subjective factors, it has a great impact on the likelihood that they will repay a loan. Prior to psychometric testing, lending institutions had no way to properly evaluate a potential borrower’s character. The result has been consistent defaults by individuals who would have been identified by psychometric testing and had their loan application rejected. Not only can psychometric testing better evaluate borrowers, it is less costly than many traditional methods of credit assessment. In African and Asian countries that incorporate alternative methods of credit evaluation, avoidable defaults are less prevalent, and firm profits are higher.

Objectives of Psychometric Testing in the Loan Process

Online psychometric tests are used to scientifically assess a person’s behavioral patterns, aptitude, intelligence, and personality traits. This creates a picture of the most important factor: the client’s character. Psychometric testing accurately measures a person’s ability to respond to unforeseen circumstances. Using psychometric testing for loan appraisal and validating disbursements would achieve significant results in credit evaluation processes. Psychometrics focus on four fundamental principles for evaluating assessment quality. These are:

  1. Reliability: Measures assessment accuracy.
  2. Validity: Measures a test’s ability to accurately assess its intended outcome.
  3. Standardization: Ensures consistent administration and results.
  4. Freedom from bias: Confirms assessments are free from various biases.

If a loan administration cycle is to be successful, these four objectives can make an imperfect process much more effective.

Introducing Psychometric Testing: The Game Changer

Almond FinTech has built a dynamic psychometric platform that uses emerging technology to provide flexibility for both customers and firms that desire ease in assessment and onboarding. Contemporary customer repayment assessment methods fail due to data manipulation and human error, making the process difficult for users. One of the most important aspects of using psychometric testing for a potential client’s financial evaluation is that it streamlines the onboarding process by removing cumbersome barriers that can be limited by the assessor.

Henry Oster Onyemah is a Credit Partnership Lead – Africa at AlmondFinTech

Almond FinTech is a B2B technology company making financial services affordable and accessible to people around the world, regardless of income. Through our multi- blockchain cross-border transfer protocol, we remove financial barriers and deliver transfer and credit scoring tools that empower everyone, everywhere.