Last Week in Lending: Monday, 6 May 2024

Reflecting on recent developments in the financial services sector, I see two significant trends shaping the fintech lending landscape in 2024:

1. Alternative data and data-driven decision-making will continue to fuel innovation and drive hyper-growth in the sector.
2. However, as fintech expands, there will be an adjustment period during which regulators and bureaus will strive to establish robust reporting mechanisms to enhance transparency within the industry.

Following these themes, here are 4 articles that caught my attention over the past weeks:

1?? US Federal Reserve signals interest rates will be higher for longer, but are there limits to what this can achieve?

Last week the Federal Reserve announced that US borrowing costs are likely to stay higher for longer as the country continues to battle with inflation.?

Following the announcement, I read an interesting Financial Times deep dive that suggests there may be limits to what high interest rates can achieve in the US economy. This is because different sectors respond at different speeds to hikes. Some sectors, such as the transport sector and financial services, respond very quickly to higher interest rates, but others are much slower.

In the article, Tej Parikh mentions that continuously high interest rates can put excessive pressure on these faster-reacting sectors of the economy, suggesting that there may be limits to how long they can stay high without placing an unbalanced burden on different parts of the economy.

I highly recommend reading this one, it has some interesting insights!

Check it out here ??

2?? ‘Pay Later’ lenders have an issue with credit bureaus (according to 纽约时报 )

Over the past couple of years, BNPL-related purchases have skyrocketed, raising concerns among regulators and CRAs about invisible debt that isn't reflected in credit reports or scores.

According to a recent report by The New York Times, Apple's decision to report loans from its Apple Pay Later program to Experian seemed like a breakthrough, but other major pay-later providers haven't followed suit, and some are considering alternative credit bureaus.

Now, the debate is around the readiness of the credit reporting system to handle pay-later loans. However, it seems both sides acknowledge that they will eventually have to integrate BNPL loans into credit scores – something that will likely be driven by market shifts or upcoming regulatory changes.

Read more here ??

3?? Nova Credit on the State of Alternative Data in Lending

Nova Credit has published a great overview of alternative data usage in 2024 and beyond. Two statistics that stood out to me:

“A majority (78%) of lenders still use traditional, credit data-based underwriting as their main form of risk assessment.”

However… “90% of lenders feel that access to more alternative data - including non-traditional data sources such as bank transaction data, employment data, payroll and pay stub data, and utility data that are not included in traditional credit data and bureau reports - would help them approve more worthy borrowers.”

I couldn’t agree more that alternative data is the key to unlocking value and innovation in lending. Today’s market leaders, particularly those in fintech, are building credit scoring techniques that rely mostly on alternative data, as traditional credit data alone doesn’t provide enough real-time financial insight for a vast majority of the consumer population.

It’s also great to see that alternative data adoption seems to be gradually gaining momentum among more established financial institutions in the market, especially as these players also play a significant role in improving financial inclusion in the US.

Read the report here ??

4?? Simon Taylor lists the Top 10 fintech innovations

I loved reading Simon’s list of top innovations in fintech right now. One of my personal favorites was No. 2: Cashflow / Alternative Data Underwriting.

Why is this such an important innovation? As explained by Simon, “genuine financial inclusion and lending innovation is unlocked when we can lend to consumers with lower credit scores who are likely to repay a loan.” – I couldn’t agree more!

In addition, Simon highlighted that across all 10 innovations, three key themes emerged, one of which was “using data for better risk management.”

I'm continually impressed at the ways fintechs and banks are harnessing data (both internal and external/third-party) to evolve their lending models to make more informed risk decisions.

In terms of alternative data, I believe the challenge fintechs are solving is evolving from "How do I best access it?" to "How do I best harness the power of it?"

Check out Simon's list here ??