JJ Hornblass, Royal Media CEO

Hi everyone, this is JJ Hornblass and welcome to Fintech Unfiltered from Bank Innovation, the leading digital news service for the banking and fintech sector. This is our Weekly Wrap for what is happening in fintech during the week of September 28. I want to thank bank innovation advertisers for their support before we kick it off, and they are Blend, Mambu and Q2e-banking, so thank you to them. And I’m pleased to be joined by Rick Morgan and Bianca Chan. From the Bank Innovation team. Hi to both of you. It is Friday, October 2, 2020. This week, President Trump and his wife Melania tested positive for COVID-19. COVID cases in New York are surging again, with some counties reporting that cases have topped the all important 3% of the total population mark for the first time since June. House Democrats on Friday passed a $3 trillion tax cut and spending bill aimed at addressing the economic fallout from the coronavirus outbreak, it is less unlikely to get through the Senate, let alone the White House and today marks the 70th anniversary of the first publication of a Peanuts cartoon. And I wonder what Charlie Brown would say about our current state of affairs, that is not the subject of our podcast today. What is or at least the start of our discussion, our difficulties around predictive models. The coronavirus pandemic has created a disruption to the level where the predictive lending models that are being deployed are really it is unclear whether the accuracy of them so an executive from Affirm said this week, evolving consumer spending, evolving payment behavior, government response business operations changing based on shutdowns will continue to affect lending data or lending related data I should say. And hence the predictive power of models. Everything will change in how we look at data and prediction in matters of days and weeks, not even months. So this degradation of lending models, Bianca implies I believe, climbing credit losses going forward for fintech lending companies. What’s the sort of scope of implications of these data shortcomings that companies like Affirm? And then even also, like TransUnion are finding today?

Bianca Chan, news editor at Bank Innovation  

Yeah, so if we could use maybe Affirm as a microcosm, and this by the way came from a panel discussion at the LendIt Fintech, USA 2020 conference that the virtual conference that went on this past week, but, you know, it seemed as if everyone was kind of expecting repayment levels at a firm to drop basically, and for people to not be making their payments. And that turned out to not be the case. said their chief risk and strategy officer. The implications, I think, for fintechs. credit reporting agencies and banks as well is they’re going to need to incorporate different forms of data that better reflect the state of people’s financial standings, basically, I mean, we’ve talked about alternative data a lot. It’s nothing new. But I think it’s with COVID. It’s going to become table stakes. TransUnion representative mentioned that they’re working to integrate employment data and income data because the sort of traditional data just won’t cut it, as, as you said that they were forecasting 20 to 35% degradation in their models. Basically evaluate, you know, the likelihood that bad things will happen. And the just sheer randomness that COVID has in its impact on people. You know, the TransUnion representative brought up how dentists are losing their jobs but based on traditional data, you know, that wouldn’t necessarily be reflected.

JJ Hornblass 

I mean, Affirm had a reined in its lending practice, its lending right as the coronavirus pandemic took hold, so they’re extending less credit. I mean, is it you know, to what degree should there be an expectation that FinTech lending companies are really going to have to scale back on their lending, just because, you know, the degree of confidence that they can have in their predictive models is not there. You don’t even know whether tomorrow? I mean, today, we had the president testing positive for COVID. Who knows what happens tomorrow? I mean, does that kind of put a damper on lending from the FinTech channel, at least going forward in the forthcoming year, let’s say.

Bianca Chan 

I’m not sure if we’ll see a concrete pullback in lending or extending credit, but I think what we will see in what Affirm has done is they put in more safeguards into their decision process or asking for higher down payment. They are, you know, shortening their loan terms. They, so they put in these these various sort of levers that they can kind of play around with as they see how the repayment rate is.

JJ Hornblass

You’ve got that. I mean, that’s their near term. So you would expect that. I mean, I would expect other lenders to be in a similar posture. Going through there. So, you know, I just wonder what that does overall, to the FinTech lending space, whether you’ve got the prospect of kind of like, overall lower originations because of this, this kind of, you know, variants and problems or uncertainty, I should say, not problems, you know within their underwriting models.

Bianca Chan

The way that these loans play out right now, the ones that have been originated throughout the coronavirus pandemic, I think, will play a role in how they originate loans, like long term, as we saw through the Yeah, throughout the earlier months, they kind of were clutching their pearls, you know, putting in these these safeguards in terms of the decisioning. And now we’re seeing them relax a little bit. So we’ll see if that’s the same case, the long term.

JJ Hornblass 

And exactly why is that the case? I mean, is it that they’ve got enough near term credit performance data that would allow them to do that? Or is it just that there is a certain sense of a stasis in terms of, you know, economic trends or recession?

Bianca Chan 

Yeah, so I think it’s the short term, so sort of the payment volumes that they’re seeing. And Sandeep Bandar, who’s the chief risk officer also mentioned that they’re seeing a stronger applicant profile overall, higher average incomes. And so I think that’s also playing a role.

JJ Hornblass

Yeah. I don’t need to get into that. Okay. Well, I will get into that, because I think that that implies that it is the economically stressed that are simply not borrowing, they don’t have the capacity to purchase and that’s why it’s skewing towards, towards a higher credit band. But this kind of echoes to another point that we wanted to talk through which is kind of technology that is oriented towards folks who may not have the full financial wherewithal or you know, considered underbanked. Rick you did a story this week about two such companies Nova Credit and CredoLab.

Rick Morgan, news editor at Bank Innovation

Based out of Singapore.

JJ Hornblass 

In case anyone’s going there, after the pandemic. Tell us a little bit about why these two startups deserve our attention now?

Rick Morgan   

Well, they’re doing something that fintechs have been promising to do for a while, which is, you know, deliver financial products into the hands of underbanked consumers. You know, it’s a great mission. But it’s, you know, a lot of times, it’s easier said than done. Credit Passport is really focused on a very specific subset of the underbanked population, newcomers to the US, immigrants. A lot of immigrants, when they come to the US have a very robust credit profile in their home country, but they just can’t access that when they move to the States. And Nova Credit with its credit passport product has been able to transfer those credit scores into the US credit bureau system, so that immigrants can actually access their scores from back home, which is a pretty interesting approach there. They’re partnering with large institutions to do that, they have a partnership with American Express. And they really feel that partnering with these larger institutions can make the biggest or you know, have the biggest reach and have the biggest impact overall. And like we mentioned, CredoLab, which is based out of Singapore again, okay, they, they really use smartphone data and web data to analyze consumer behavior and decide, you know, what comes across as risky, what comes across as responsible. They look at things like how many apps you use, what types of apps you use, you know, whether or not you’re scheduling lots of things at nights and weekends versus during the day, what your calendar looks like, your rate of outgoing versus ingoing text messages, and they look at your web data, you know, how fast you type? How long does it take you to type in your date of birth, something you should know off the top of your head? How long does it take you to go from page one to page two. And on mobile data alone, they have about 50,000 different data points that they use, and they have risk modeling to predict what’s going to be a risky behavior consumer and what’s going to be a non risky piece of behavior to sort of provide credit scores that go beyond traditional credit bureaus. And the data that, you know, the big credit bureaus here in the states use.

JJ Hornblass  

I mean, this is you’re kind of getting into how they operate. But why is this? You know, what is the need for the underbanked? Like, what specific technology do they need?

Rick Morgan 

Well, I think they, they need data that will go beyond what we have available with the credit bureaus, the credit bureaus do a lot of things well, but you know, a lot of consumers are just left behind by them, and they’re unable to crack into the financial system. And you know, a lot of alternative data that they talk about in the states is transactional data. You know, what are you doing with your money, that’s a new way, that’s, you know, relatively new to to underwrite people, and that’s great, but a lot of underbanked consumers can’t even open a bank account, so it does nothing. So they need something else to show that, hey, I am a responsible person, I’ve, you know, I might not have ever had a chance to prove that yet. And I might not have a credit file. But just the fact that I can’t open a bank account and can’t get a loan doesn’t mean that I’m not going to be responsible with that money. So they need something that they already use on a day to day basis to show that, hey, I’m a consumer, I’m a responsible consumer, you can trust me with a loan.

JJ Hornblass 

Why do you think that this is going to make a kind of a dent? Now? I mean, just like what we were, Bianca and I were talking about three of us we’re talking about right? Affirm and the challenges facing lenders. Yes, sure. So you’re able to provide a sort of deeper data profile of the underbanked consumers but if there isn’t necessarily the risk appetite to go there. Do you know to what degree do the tools matter?

Rick Morgan  

Well, I think it’s also important to note that Affirm you know has a pretty specific business model with a buy now pay later obviously the branch now and other things but they have a pretty niche business. At least as of now. Like I said, they are trying to branch out but the buy now pay later space is pretty interesting, but kind of its own little beast. I think that the reason it’s interesting I think it’s gonna start making a dent now is just because the technology is getting better to the point where it can actually underwrite people more accurately. So I think that that’s going to make a bigger, bigger impact. And also, you know, we are coming out of a recession, people are going to need capital, and people are going to need tools to get them back on their feet. And when this is all said and done, and the economy sort of stabilizes. There’s no reason that underbanked consumers who, you know, have weathered the storm should be left behind. 

JJ Hornblass 

There’s been talk about fintechs, serving the underbanked since the beginning of 09. Yeah, at least 10 years. So is there any indication that that dent has been made? Is there any indication that that population does have more banking service? And it’s not just that they have banking services that they have access to banking services that are not predatory?

Rick Morgan 

It’s a good question. And I wish I had better data on this. You know, I think that this is just my own sort of hypothesis. I think there’s a big emphasis on like, b2b right now, you know, like direct to consumer startups, there’s still a lot of them, and they’re still some of them are doing great. But you know, the b2b kind of atmosphere is a lot hotter, right now, people kind of want to partner with financial institutions, and financial institutions, you know, social good and social responsibility, corporate social responsibility is becoming a bigger piece of their business plan. And so they want to reach these underbanked consumers to show that they’re doing good, and the startups want to partner with them to help them. So I think going through that, that route will make a bigger impact. I think the direct to consumer model can still make it make a difference, you know, you have startups like, you know, LendUp MoneyLion, even Marcus by Goldman Sachs, which is not exactly a FinTech startup, but nevertheless, you know, digital banking options that can reach these underbanked consumers. But I think that this new emphasis on let’s partner with banks and go through them to get our product in the hands of a lot more people a lot faster and scale it up. I think that is gonna probably have a bigger impact now that that’s becoming sort of in vogue.

Bianca Chan 

Yeah, if I can add, if you look at other kind of alternative lenders in the space, so two that come to mind, our auto lenders, Lendbuzz and Tricolor, if you look at their origination volumes, they’re growing two digit or sorry, you know, double digit, yeah, not two digit. And it’s just insane. So if we were trying to gauge you know how much of this untapped market is getting served, we can just look to the lenders that kind of specialize in the space. And then to your earlier point about, you know, whether there is the risk appetite there, I think that the mission of these fintechs and these vendors is to show that it’s not they’re not such risky borrowers.

JJ Hornblass  

Right, right. I understand. This week, Rick, you published the 31 best taglines in financial services now. How you came up with the number 31? I don’t know. That’s not for our discussion right now. Bianca and Rick, what is your favorite tagline?

Rick Morgan

My favorite, and this is not going to be a popular choice, but mine was a Huntington Bank, which was just “Welcome.” And that was it. It was simple and to the point.

Bianca Chan 

That was mine too actually. I think maybe there was something about it that kind of stood out, Klarna’s too I thought was funny. I’m gonna butcher it but it was something about you know, yeah Swedish…

Rick Morgan

Swedish for smooth shopping.

JJ Hornblass 

Yes, that’s right. I thought that I think I’m kind of old school-ish about it. And my favorite was Visa’s still, “Everywhere you want to be.” I think it is a very good tagline. And does anyone want to share their least favorite tagline?

Rick Morgan  

Ah, I don’t want to make any enemies now but I mean, I thought that “This is Wells Fargo” was a little bit bizarre it kind of it first I thought it was just a little bit bland. But I mean, I guess they are kind of trying to move on from some of the past incidents and scandals. So I think that’s maybe just they’re trying to reinvent themselves and say, Hey, this is like a new version of us. So I think in context that sort of makes more sense, but at the first reading, I was like, a little weird, but yeah.

Bianca Chan  

You know, I’m trying to remember what Ally’s was because I remember reading it. I was not that interested in it. I think the fact that I can’t even remember…

Rick Morgan

Do it right.

JJ Hornblass  

I think the correct answer is, Rick. That’s what we have. Coming up next week, guys?

Bianca Chan  

We’ll be taking a look at new technology and innovative methods in wealth management.

Rick Morgan

Yeah, we’re also going to look at there was a hearing this week about the future of sort of like bank charters. I believe the OCC hosted it, talking about the you know, the industrial loan charter and the specialty FinTech charter that is, you know, had its problems in court. So we’re going to be talking to some experts about what we can expect to see there moving forward, given that hearing.

JJ Hornblass  

Good. Okay, thank you. And thank you all so much for visiting with us. Please rate us on your podcast platform and email us at info@bankinnovation.net. And of course, follow us on Twitter and LinkedIn and please join us on BankInnovation.net for more news and analysis. Thanks for being with us. We’ll see you next time.