Configurational Analysis of Alternative Data Underwriting for Thin-File Borrowers In Digital Financial Services
This study employs fuzzy-set qualitative comparative analysis of CRED and Paytm to demonstrate that while multiple equifinal configurations of alternative data and technological capabilities drive sustainable digital financial services for thin-file borrowers in India, robust internal risk governance remains a mandatory necessary condition to ensure long-term institutional trust and prevent portfolio degradation.
Original paper licensed under CC BY 4.0 (https://creativecommons.org/licenses/by/4.0/). This is an AI-generated explanation of the paper below. It is not written or endorsed by the authors. For technical accuracy, refer to the original paper. Read full disclaimer
In the world of lending, a long-standing barrier has kept many people from borrowing money, even when they have the ability to pay it back. For decades, banks and financial institutions have relied on a simple rule: if you cannot show a history of borrowing and repaying, you are considered too risky to lend to. This creates a difficult situation for millions of young adults who have steady incomes but have never taken out a loan before. Because they lack this traditional paper trail, they are often locked out of the financial system, unable to buy a home, start a business, or manage unexpected expenses. In recent years, technology has offered a new way forward. Instead of looking at old credit reports, digital lenders can now look at a person's daily digital life—how they pay bills, how they move money between friends, and how they shop online. These digital footprints act as a new kind of proof, showing lenders that a person is responsible even without a formal credit history. However, simply having this new data is not enough. The question remains: can these digital tools actually create a safe and stable way to lend money to people who were previously ignored, or does the speed of technology introduce new dangers?
Researchers Thushar Madhusudhan and Chinmoy Kumar set out to answer this question by studying the digital lending landscape in India, a country where millions of people use mobile phones to manage their finances. They focused on a specific group of borrowers known as "thin-file" consumers—young adults with verified incomes but no traditional credit history. The team examined twenty different financial companies and platforms over a five-year period, from 2021 to 2025. Their goal was to understand what combination of factors allows a lender to successfully serve these new customers without losing money on bad loans. They did not look at technology, company rules, and outside regulations as separate items. Instead, they treated them as a single system, asking how these pieces must fit together to work. They found that having access to fast, real-time data about a borrower's spending habits is powerful, but it is not a magic solution that works on its own.
The study revealed a clear and surprising truth about how sustainable lending works. The researchers discovered that the most advanced technology and the most detailed data are useless if the company using them does not have strong internal rules to manage risk. In their analysis, they found that a company could have the best digital tools in the world, processing millions of transactions every second, but if it lacked a solid framework for checking those risks, it would eventually fail. The data showed that strong internal governance—meaning strict rules about how much money the company can lend, how it checks for fraud, and how it prepares for bad times—is the one non-negotiable requirement. Without this foundation, even the most sophisticated digital systems lead to financial trouble. The researchers described this as a necessary condition, meaning that no matter how clever the technology is, it cannot succeed without this safety net.
When the researchers looked at the companies that were successful, they found that there was not just one way to achieve stability. They identified two distinct paths that different companies took to reach the same good result. One path was followed by large, traditional financial companies that had built their business slowly over many years. These companies did not rely heavily on new digital data streams or complex internet connections. Instead, they maintained low rates of bad loans by sticking to their old, proven methods of checking borrowers and keeping their lending networks small and controlled. The second path was taken by modern digital platforms and technology companies. These companies used high-speed data from mobile payments and online shopping to find borrowers instantly. However, they only succeeded because they paired this high-speed data with very strict internal rules and strong partnerships with established banks. The study showed that these two very different approaches—one slow and traditional, the other fast and digital—could both lead to a stable business, but only if the fast-moving digital companies kept their internal safety measures tight.
To prove that their findings were not just a theory, the researchers looked closely at two specific platforms that operate in India: CRED and Paytm. These two companies represent the two different paths the study identified. CRED operates like a selective club, carefully checking the financial history of its members before letting them borrow money. It focuses on a smaller group of people who are already known to be responsible. Paytm, on the other hand, operates like a massive highway, processing millions of tiny transactions every day from people all over the country. Despite their completely different styles, both companies achieved the same result: they were able to lend money to people who were previously excluded, while keeping their loan portfolios safe. The researchers found that both companies succeeded because they did not let their technology run wild. CRED used its strict membership rules as a filter, while Paytm used automated systems to constantly watch for fraud and stop risky transactions the moment they happened. In both cases, the technology was the engine, but the internal rules were the brakes and the steering wheel.
The study also looked at what happens when companies get the balance wrong. They found that when a digital platform tries to grow too fast without putting strong rules in place, the results are disastrous. In the data, there were examples of companies that had great technology and access to huge amounts of data but lacked the internal discipline to manage the risk. These companies saw their loan portfolios collapse, with a high number of borrowers failing to pay back their debts. The researchers concluded that the idea that technology alone can solve the problem of lending to the poor is a mistake. Technology can open the door, but it cannot keep the house safe. The real key to success is the combination of new data with old-fashioned, careful management.
This research offers a clear lesson for the future of finance. It suggests that the path to financial inclusion for millions of people does not require choosing between high-tech innovation and careful regulation. Instead, it requires both. For digital lenders to be truly sustainable, they must build their business on a foundation of strong internal governance. They must treat their data not just as a tool for finding customers, but as a signal that must be constantly checked against strict safety standards. The study confirms that while the world of lending is changing rapidly, the fundamental need for responsibility and oversight remains the same. The most successful companies are those that understand that their technology is only as good as the rules that guide it. By combining the speed of digital data with the stability of strong governance, financial institutions can finally open their doors to the millions of people who have been waiting for a chance to participate in the economy.
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