On February 28, 2019,1871 Chicago welcomed leading fintech and banking professionals to discuss ways to innovate, strategize and operate for the future of unsecured lending. Capco held a panel session on the topic to share ideas on advances in technology, new products and lessons from the front-line to help accelerate industry momentum.
The panel included:
- Stephanie Klein, CEO of Braviant Holdings
- Sougandh Kalluri, Head of Unsecured Credit Risk at HSBC
- Samir Patel SVP for Personal Loans at Discover Financial Services
- Lane Martin, Partner (Banking) at Capco
Identifying fraud measures within data proliferation
Our panelists acknowledged the importance of increased security measures with the proliferation of personal data across email, social media, websites and other platforms. Technology provides the means for the banking and payments industry to access more data, and with this comes increased first, second, and third-party risks.
Now more than ever, there is increased regulatory oversight on how organizations are positioned to manage and address these inherent risks. Samir Patel from Discover suggested organizations and data providers should collaborate on tools that improve security measures. Many vendors are uniquely positioned to help financial service providers identify patterns of fraud and protect against cyber risk by helping identify channels that are most vulnerable to fraud and cyber-attacks.
Building a strategy for fraud in the unsecured space
Unsecured lending has seen an enormous surge in popularity among consumers willing to accept the trade-off of higher interest rates and smaller loan allotments for the ability to borrow without collateral. Sougandh Kalluri, Head of HSBC Unsecured Credit Risk, says that organizations should reduce customer friction, build teams to use customer data, and work closely to prevent future fraud incidences when entering new product spaces like unsecured lending. “It won’t be a ‘one solution fixes all’ scenario,” said Stephanie Klein, CEO of Braviant Holdings. She went on to share how the challenge will be strategizing for each unique type of fraud, channel, customer and situation that a threat may pose.
Using alternative data sources to protect against fraud
According to recent studies, “nearly 60 percent of banks are now using alternative data sources to protect against fraud,” said Lane Martin, Partner for Capco’s Banking Domain. The overall trend is to check multiple sources of data which serves as an increased measure of security. For example, in the online lending space, some alternate data may include verifying name, cash flows, ability to pay, creditworthiness and average daily balance. By taking these extra steps, organizations are better prepared to address and prevent fraud instances.
Operating in the regulated space
Banks and fintechs are experiencing heightened oversight by regulators to remain compliant with cybersecurity measures. As Sougandh Kalluri explained, fintech firms’ advantage is their agility and organizational size; however, getting up to scale and entering the regulatory landscape remains a challenge. Particularly in the unsecured lending space, banks can leverage their history working with the regulators. When entering a new market segment or service offering, banks and fintechs must consider the possible all risk and potential downside.
Securing new customers and cross selling
Our panelists agreed that customer-centricity should be the organization’s focal point for securing new customers and cross-selling products. Samir Patel encouraged organizations to provide consumers the best experience possible by focusing on existing customers as they are more likely to use other products. They can then start thinking about acquisition strategy for new customers and how an organization can create value even if it means cannibalizing their business lines.
Lessons learned from building new products
When given the opportunity to build new products and to enter the unsecured lending space, Kalluri said the offering needs to create clear value. The organization may need to partner with fintechs to improve speed to market. An example of this is card businesses where banks partner with a fintech that has the technical expertise to build out card payment services. At the same time, an organization needs to make sure that they are not solely leaning on the vendor.
In the past, fintechs started mono-line business models for years until expanding into something new which may not necessarily cross-sell products. A new trend is challenger banks arising and fintechs ‘white labeling’ with banks to take more market share and increase lifetime value. Look for these changes to impact community and middle tier banks with some dilutive risks for bigger banks.
Fintechs want to move away from installment-only lending, which is cyclical. They are looking to enter transaction-based revenue, obtain less risky revenue, lower customer acquisition costs, and position themselves to get customers with different products and life cycles. Unsecured loans will be one of the many products fintechs will offer, and there will likely be partnerships with banks in this space. The panelists agreed that the key to success in the long-term is to prepare for a possible economic downturn or reset in the near term.
For more information about unsecured lending, please contact Lane Martin.