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In February 2020, a woman in Australia found a small metal rod in her McDonald’s chicken and cheese burger. Close to two years later, another woman in the UK found a snail - a snail - in her burger from the same fast food giant. The franchise outlets were thousands of miles apart, but the brand name got dragged through the mud.
Why am I talking about burgers in a newsletter meant to be about finance? Because if you replace McDonald’s with any lender and the snail/rod with delayed loans or poor customer service, you’ll see exactly what could go wrong with the decentralized distribution.
Let me explain with another example.
Any one of us who uses an Apple product knows how easy it is to get sucked into the brand’s ecosystem. You start with an iPhone, and before you know it, you’ve got the latest MacBook, the AirPods, the iPad…you get the drift. Each product integrates seamlessly, giving you continuity and convenience like never before. So even though an Android phone may have better features and battery life, you don’t want to give up your iPhone because that would mean giving up on that continuity.
This also explains why Apple takes so long to bring out a new product - it has to make sure it integrates well with the rest of the ecosystem and that it's of the highest possible quality - that’s why people pay a premium for their products. Essentially, the brand has tight control over every part of the ecosystem because it owns every detail. The user experience is immaculate, so the pocket pinch doesn’t matter quite as much.
Now, let’s take Google’s Android. It’s a far more open business model than Apple - brands across the board can use Android software on their devices, Android users can install apps from any source, and use their device with accessories from almost any brand. Its open source ecosystem means it has more users and therefore sells more devices - so it can price them cheaper.
But this impressive distribution comes at the cost of uneven customer experience. Google has little control over how X brand of Android devices handles customer service complaints and how Y brand designs its interface. Third-party banking partnerships are comparable with this Android model - and to the McDonald’s franchisee model.
The logic is simple. When you allow outside entities to enter your ecosystem, you might lose some control over quality - both the product and the experience. When you’re working with hundreds of loan agents who then have their sub-agents, it becomes impossible for you as a lender to track what each one is doing. When you’re listed on a third-party aggregator platform, you don’t have much control over the UX of that platform and the time it takes to disburse a loan.
Coincidentally, RBI is also tackling the same problem - it's losing control as a regulator over digital lending. In an effort to wrest back some of that regulatory oversight when multiple entities get involved in a digital loan, it released 'Recommendations of the Working group on Digital Lending – Implementation’, in which it recognised Loan Service Providers (LSPs) as agents of Regulated Entities (REs), i.e. scheduled commercial banks and NBFCs. Among other things, LSPs are required to: - Appoint a Nodal Grievance Redressal Officer and display their contact details publicly on its website
- Ensure compliance with various technology standards/ requirements on cybersecurity stipulated by RBI to offer digital lending
- Display information relating to the product features, loan limit and cost, etc. at onboarding/sign-up stage for borrower awareness
These recommendations are welcome, IMO, but we'll see how it pans out.
Coming back to lenders and third parties, there are more serious issues of data security. When you enter into a partnership, your security of your customer data is at stake. And you don’t have to look too far back to see how it could go wrong. In 2017, Italian bank Unicredit announced that sensitive data of a massive 400,000 loan applicants had been breached due to the hack of a partner’s systems. In the same year, US brokerage firm Scottrade suffered a data breach due to a third-party partner’s error when uploading the database to a server without adequate precautions.
Clearly, decentralization and partnerships have their downsides. I’m not saying it should be done away with - I’m advocating for the provision of safeguards - the right mix of federal and unitary approaches, you could say.
My colleague and I were discussing a possible fix - a CRM solution that will allow lenders and platforms to seamlessly align their frontline business, operations, risk and risk policies, credit decisioning and analytics, and most importantly the IT systems and data. It’ll give lenders insights into every borrower, and give them the data required to run targeted communication campaigns when needed.
I’d love to hear your thoughts - do you believe a little control is a good thing, or that decentralization thrives with a laissez faire approach? Write in and let me know!
Signing off for now - here are my reading recommendations for the week:
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. See you next week! Mayank