The Pattern #21: If data is the new oil, digital credit is ripe for an explosion

Mayank Jain   /    Head - Marketing and Content    /    2022-08-05

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    Hello everyone, 

    Hope you had a good week. I did. We came back supercharged and refreshed from an offsite at Goa. Upon coming back, we jumped right into things and published perhaps the first report on the performance of the Account Aggregator Ecosystem. We saw a huge improvement in conversion rates, a reduction in fraud and an overall improvement of borrower experience as well as the digital lending economics. 

    You can read more about the report here.

    The reason all of us at FinBox are so bullish on the AA ecosystem is because its momentous in what it’s solving - a lack of data standardization, access, and economics - all being solved through a simple consent-based architecture and pushed cohesively by the banking regulator, the government and other policymakers. 

    If digital lending is a journey from a point of extreme uncertainty to a decent amount of confidence, data-driven decisioning is the route to get there and innovations like AA are the highways. It’s fast, seamless, and has very little scope for obstacles (drop-offs, technical failures, fraudulent data etc). 

    Last week, Boston Consulting Group released a report which articulated this and predicted a massive explosion of data standardization, digitization, access enablement through open protocols such as AA and ONDC. As follows: 

    “ONDC is expected to democratize commerce, reduce acquisition costs, improve competitiveness of small sellers and enhance price and merchant discovery of buyers; whereas OCEN is expected to dramatically improve credit access to MSMEs by enabling cash-flowled underwriting for MSMEs, given data proliferation. 

    In its end state, digital service providers will connect to the ringfence of regulated entities and source customers for payments, credit, and savings, while leveraging the architecture across journey stages.” - the BCG report stated. 

    This is just one part of the story. The next part of the story involves the data streams diversifying beyond the usual and adding depths and dimensions to the credit decisioning for banks, NBFCs and FinTechs alike. 

    An Experian report published earlier this week emphasised this and spoke about how alternate-data driven underwriting and risk management are among the big priorities for financial services players in the coming years. 

    The report highlighted five major priorities for 5 lenders from its survey and that include: 

    1. Improving regulatory compliance 

    2. Improving credit decisioning effectiveness

    3. Improving capabilities to identify micro and macro risks 

    4. Developing early warning systems (also see: FinBox CollectX)

    5. Increasing automation 

    These priorities stem from a very real need for lenders to go beyond the top tiers to expand their lending portfolio and manage their overall profitability. We published a whitepaper on how lenders can embrace risk and turn this into a growth strategy. You can read it here

    Finding diamonds in the rough 

    But it’s easier said than done. Lending is one of the few businesses that start with giving money. It’s not enough to just be ambitious and have money, it’s more important to have the right decisioning that predicts with a reasonable amount of accuracy if that money is ever coming back or not. 

    Just put yourself in the shoes of a lender for a minute. Imagine you give just Rs 100 to 10 of your friends on a flat 10% interest rate for a month. Your upside from the entire exercise of choosing the friends, giving them the money, reminding them for repayment and then collecting it is 10% or Rs 100 (10%*100*10 friends). 

    But, imagine if just one of your friends turns out to be a bad borrower. You lose the entire Rs 100 that you lent out. Now, even if the rest of the 9 friends repay on time with due interest, you’ve made zero money on this exercise and probably lost a bunch of time and money in the operational cost. 

    Now scale this model 20,000X and imagine what would happen to a lender’s books if it had three such non-paying friends in every pool of 10 instead of just one. Blimey. 

    The point I am making is that it’s not just about knowing who to lend, it’s also about how much to lend, when to lend, when to collect and at what interest rate to lend. 

    These dimensions add multiple layers of complexity and hence, the more you can find out about your borrowers the better. This doesn’t mean that you start asking them if they injured their foot playing cricket in school. Information is one thing and insights are another. 

    Lenders need information that is insightful, actionable and relevant. Look at this graphic from the Experian report that details just how many kinds of borrower data can now be analyzed to enable credit decisioning.

    With alternate data being used by only 42% of the surveyed lenders, it’s clear that a lot of new-to-credit customers or thin-file borrowers knocking the doors of lenders for credit are leaving disappointed. 

    More than 76% of respondents confessed that their orgaizations decline credit to viable customers due to insufficient data. This is an incredibly high opportunity cost.

    In a data abundance state, it’ll be grossly limiting to restrict one’s underwriting to one single source of truth. Each new data source adds a new dimension, and probably, opens up the possibility of expanding the pool of borrowers - while improving approval rates and reducing the overall risk. 

    It’s clear that the future of digital credit is set to be more automated, seamless but for it to be sustainable (i.e. profitable), superior decisioning prowess and risk management will hold the key.

    In this paradigm, it’s interesting to see just how many FinTech-bank partnerships have come along over the last week. This is a great opportunity for legacy institutions to capitalize on their core strengths and double down on the digital ecosystems by partnering with nimble FinTechs that have already made inroads. 

    I will let the BCG report provide a conclusion.

    This is all from me this week. I will see you next week. 

    As always, please find some reading recommendations below. 

    Reading list  1. We are well placed to let Fintech lead the success of digital India 2. Fintech startups look beyond lending 3. How are banking apps’ lousy UX weighing them down? 4. Bridging the technical divide: Can mid-size banks compete in the big league? 5. Why new-age fintechs fear death by a thousand circulars

    Thank you for reading. If you liked this edition, forward it to your friends, peers, and colleagues. You can also connect with me on Twitter here and follow FinBox on LinkedIn to never miss any of our updates.  

    Cheers, 

    Mayank 

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