The Next-Generation of Data-Driven Lending

Post COVID-19, and as we navigate our new normal, banking and lending (much like many other sectors) will undoubtedly be transformed. Every passing news bulletin and hastily prepared headline further illustrates how inextricably linked the health of our citizens, our economy and our financial institutions have become. With the postponement of beloved Champions League thrillers, Love Island disputes, and inevitable Irish medals at the Olympics, all we have left is Chancellor Rishi Sunak announcing an increasing number of business supports from the Number 10 lectern. Not the summer I had in mind. The CBILS (Coronavirus Business Interruption Loan Scheme), CLBILS (Coronavirus Large Business Interruption Loan Scheme) BBLS (Bounce Back Loan Scheme) and indeed the hotly-oversubscribed Future Fund (focusing on supporting UK’s leading innovative startups) have all been announced amidst much debate. Nonetheless, in early-May, the Bank of England released a gloomy forecast. The UK economy is set to shrink 14% this year, while unemployment is set to double, guaranteeing a recession deeper than anything we’ve ever seen in this country.

However, as the economic fallout continues to spread, I had the pleasure of debating whether modern technology, advanced analytics and a data-driven approach can hold the keys to ensuring banks and fintech leaders continue to scale despite this rapidly evolving credit crisis. Joining me on ‘The Next-Generation of Data-Driven Lending’ were:

• Freddy Kelly – CEO of Credit Kudos
• Simon Cureton – CEO of Funding Options
• David Luck – CEO of Capital on Tap
• Garrett Cassidy – CEO of Trezeo

Clearly, these are unprecedented times, but should the Government be doing more to support our businesses?

Garrett Cassidy, CEO of Trezeo, put it bluntly - “the Government was too slow to react, and the solution was not ideal”. Established in 2016, Trezeo provides financial stability to the self-employed – typically the most vulnerable groups in our society that have turned out to be the lifeblood of the economy during the crisis. With an absence of any Government supports for the self-employed, and with 25% of Trezeo’s customers falling ill or being forced to stop working, Trezeo jumped into action offering sickness protection insurance to their many vulnerable customers.

There have been further grievances, particularly amongst the fintech community, that Government supports have been centred on the traditional financial institutions – those that were most at fault during the ’08 crisis. David Luck, CEO of Capital on Tap (one of the UK’s most recently accredited lenders on the CBILS scheme) backed this up stating that “there is an uneven playing field for alt lenders right now”. A lot of alternative lenders were established to restore order in the wake of the 2008 recession making the Government’s slow response towards them even more difficult to fathom.

According to Simon Cureton, CEO of Funding Options, “This period shows a certain misunderstanding and mistrust of this sector meaning we need to work alongside the Government to show them that we are worthy of the reputation as it is seen internationally. We are accountable so should be supported in same way as banks and building societies”.

Can digitally-native, data-driven cultures come out on top in these particularly challenging times?

Clearly the dynamics of the SME lending ecosystem has changed significantly over recent months. Funding Options experienced a five-fold increase in loan applications in March alone – totalling over a billion pounds. Freddy Kelly, CEO of Credit Kudos - the UK’s newest Credit Bureau, further stated that “we’re all moving away from paper, branches, and a completely face-to-face relationship so we need digital tools to be able to process applications in a fully data-driven way. Covid-19 has rapidly accelerated this transformation.” It is no longer possible for an underwriter to print off hundreds of bank statements and scrawl through each page with a luminous highlighter. According to David Luck, decisions are now made on loan applications within 10 seconds at Capital on Tap while the Credit Kudos team are outputting 10000 datapoints per individual!

Garrett Cassidy, at Trezeo, also stated that “a digital journey gives fintechs a real advantage not just on lending but on onboarding, KYC and AML”. All our panellists spoke passionately about Open Banking – in a rapidly evolving era post-Covid19, underwriting based on the most up-to-date information is critical. New needs will undoubtedly emerge and fintechs will have the agility required to survive. A quote commonly ascribed to Darwin comes to mind - "it is not the strongest of the species that survives, nor the most intelligent; It is the one most adaptable to change".

However, with more resources and bigger budgets, surely the bigger banks are more prepared for an instant coronavirus response?

With extensive experience in developing web applications for the likes of Google, Microsoft and Amazon, Freddy Kelly at Credit Kudos, has an intimate understanding of what is required to develop software at scale. According to Freddy, banks and traditional financial institutions are used to Vertical Scaling – “If something is not fast enough, you can spend more money, get a bigger box, get a bigger server, more call centre employees and play around the pain”. The legacy players have survived with Vertical Scaling up until now but startups like Credit Kudos, Capital on Tap, Funding Options and Trezeo are strong advocates of Horizontal Scaling - ensuring they are building end-to-end processes allowing ultra-scalability no matter how many people are coming through the door.

Furthermore, with the ability to collect and process data at an unprecedented scale, alt lenders can start to evaluate thousands of data points. They can now capture segments of the population that would have been rated poorly in traditional metrics, not necessarily because they aren’t creditworthy, but because their lifestyles do not fit into the normal metrics e.g. recent immigrants, university graduates and the self-employed. Credit Kudos uses Open Banking to look at the volatility of income, predictability of income streams, long-term furloughing effects, financial behaviour, loan performance data, taxation data, house filings etc. while Trezeo are using even more unconventional data sources and psychometric assessments to determine credit risk.

Although there are legitimate concerns regarding privacy and data security, it is clear that data is revolutionising finance. In fact, according to Simon Cureton (CEO of Funding Options), “the only risk is that of NOT adopting a data driven approach.”

All our panellists see the pandemic as the chance for fintechs to finally show their true credentials. However, long-held concerns have re-emerged: that in times of stress, fintech’s funding structures will be strained and their poor access to liquidity will deem them inoperable. Accordingly, banks are increasingly looking to copy the formulas used by the fintechs – but RBS recently abandoned its challenger bank, Bo, just five months after launching it! Even when the technical obstacles can be overcome, banks have always fostered a risk-averse culture that clashes with the agility of the new entrants. According to Garrett Cassidy at Trezeo, “there is also a risk that traditional lenders will start to focus on this sector without the models and capabilities to underwrite them”. The future is bright for some of these fintechs but David Luck (CEO of Capital on Tap) ended with an ominous note stating that “this is not to be confused with the fact that some lenders will be purchased for cheap (buy versus build) or will go out of business but, once we get past that, I do believe alt lenders will get stronger”.

What should we be doing now to prepare ourselves for life post Covid-19?

Funding Options help businesses all over the UK find the right business finance. Working with hundreds of lenders (Iwoca and HSBC to name a couple) across the whole spectrum of funding options, they have helped customers find peer-to-peer loans, invoice finance deals, growth funding, equipment leases and even commercial mortgages. Simon Cureton, their CEO, has stated that “a number of our partner firms are feverishly working on their tech and their product so they will be a lot further down the line with their delivery and data-driven cultures when they come out of this crisis”.

Similarly, Accenture recently penned an open letter to retail & commercial banking CEO’s entitled “Responding to COVID-19”. In it, they have said that:

“This is a great opportunity to test the efficacy of new advice propositions, to understand what works and what doesn’t, in an environment where customers are likely to be forgiving of experimentation. So, don’t be snow blind in this crisis — try to design interventions and initiatives that have long-term value.”

In many ways, Superior Data-Driven Lending is not ‘Next-Generation’, it is in fact, the ‘Now’.

With all these challenges, how do you suggest we get started?

The market for credit is changing as individuals and business transact online and banking moves towards a fully digitised model. Oftentimes, however, moving seamlessly into the digital space is easier said than done. These business models can bring their own challenges:

• What if my model is consuming the wrong data?
• My models are outdated as Covid-19 has transformed people previously seen as risky into our front-line heroes with the most stable occupations - nurses, delivery drivers, supermarket cashiers etc.
• How can I satisfy GDPR requirements and convince consumers and regulators that I have policies and procedures to safeguard customer data?
• With Open Banking, we will receive more and more information from more and more data sources but how can we future-proof our technology infrastructure?
• With a huge shortage of data science talent, how can we continue to analyse this ever-increasing volume of information?

Everything we build at Altair, whether its self-service data preparation, data analytics or data visualisation, is designed to be code-free and code-friendly with Automation, Data Governance, Data Democratisation and Model Explainability at its heart. Altair are helping lenders leave the time-intensive, manually-driven, error-prone and paper-laden loan cycles in order to focus their resources on a next-generation, data-centred approach.

Reach out to find out more!