Driving Profitability in Lending Through Technology and Data
We recently sponsored a webinar with VentureBeat to discuss new innovations in the fintech industry, and how lenders are using data aggregation, warehousing, and better analysis to assess the financial health of consumers and small businesses.
Evan Schuman of VentureBeat moderated the panel, with Scott Crawford, VP of Product and Marketing, Ascend Consumer Financial; Krishna Venkatraman, SVP of Data and Analytics, OnDeck; and Terrence McKeown, Practice Manager, Credit Analytics, Envestnet® | Yodlee®.
As it stands today, banks sometimes use outdated or incorrect information to make lending decisions, and borrowers need to wait weeks for a decision. The process could be more profitable for both parties if the banks had the correct information, and they had it faster.
One trend we’re seeing, as shared by Terrence McKeown, is the use of data warehousing and data aggregation, so banks and other lenders can work quickly and easily from up-to-date information.
It’s important for lenders to connect within the enterprise between lines of business. For example, a small business lender may have to get information on a client’s checking account within the same bank or organization, but that can prove to be rather difficult because of different departmental silos. There’s an unnecessary delay that makes the borrower experience cumbersome. This is where data aggregation would help.
McKeown sees data aggregation as one of lending’s biggest challenges, and best solutions, allowing data to flow freely and easily within an organization. By breaking down the silos and aggregating the data within a single data warehouse, lenders can make the right lending decisions, because they’re working with accurate information.
Alternative data provides a more holistic view of a person’s credit, and conveys more data sources to verify a borrower’s creditworthiness. We have several Envestnet | Yodlee customers that use alternative data to better identify good credit customers and learn more about them.
Meanwhile, Scott Crawford’s team at Ascend has created a new loan mechanism that encourages borrowers to be on their best behavior, especially after a loan has been granted.
Normally, once a loan has been approved, borrowers have little incentive to stay on their best financial behavior. Crawford’s company works with FICO scores between 580 – 665, which is a risky population; small businesses are also risky borrowers. So Ascend created a loan product that co-ops the borrower into the process and makes him or her a partner in their own process.
They price their loan based on where a borrower is at a certain point in time. Rather than assign an interest rate that will last the 3 – 5 years of the loan, they update the borrower’s interest rate based on updates to their FICO scores. Within 4 months, you can earn up to 50% off your interest rate. Ascend will continue to monitor the borrower’s credit score and financial behavior, adjusting the lending rate accordingly to give a reward for good performance.
Ascend is able to do this because they’re bringing in all forms of data, aggregating it, and monitoring it on an ongoing basis to make adjustments as needed. They look at whether the debt balance is coming down (and coming down consistently). They also look at credit versus debit spending, the borrower’s savings account balances, and the trends for each of these.
As the customer performs well, they’re going to improve their loan rate, and they’re going to be in much better financial health as well.
Finally, another challenge waiting to be solved is data inconsistencies and trying to standardize data – although Krishna Venkatraman sees this as an opportunity, not problem – as data can easily be brought in and analyzed for the right signals to inform credit decisions.
OnDeck uses technology like the Envestnet | Yodlee API to source all the data it needs to allow its proprietary credit scoring system to make quick lending decisions. The credit score is built from over 2,000 data points from over a hundred sources. The result is a holistic view of the small businesses applying for financing.
If you’d like more information on how to optimize credit risk for increased driving profitability, download this white paper. And if you’d like to hear the entire webinar, you can visit the on-demand webinar page and listen to it at your convenience.