Lenders are now able to make some credit decisions in five seconds – even with so-called “thin file” clients, thanks to data gathered online – a development that could change lending in both the developed and developing world.
Alex Marsh, managing director at Close Brothers retail finance, speaking at the recent ‘Future of Lending’ conference, outlined what was possible, before adding that there are still limitations. One of the problems is that more traditional online data gathering systems were not necessarily well designed. A number of people at the event pointed, for example, to problems with the so-called “1901” club, ie people who just click on the first button they see, rather than inputting useful data. Just as importantly, even the best credit-scoring systems do not take away the need for the human element. Lending staff often need to be on hand to talk through lending decisions when a customer is denied credit. “Knock-out rules like someone having been in business for less than a year are easy to explain,” said Kevin Phillips, head of corporate development at Kabbage, which makes small business loans online. “Other scores less so.”
This is where some might argue that there are elements of lending – such as mortgages – that are will never be amenable to online credit scoring and instant decisions. After all, the mortgage product is complex, and the potential financial repercussions large, so independent and face-to-face advice will always be needed. However, there are, as some at the conference pointed out, already online brokers such as Habito that are doing well– at least in those segments where decisions are relatively straightforward. The self-employed were mentioned as one group that may struggle more than others to get a mortgage from a digital broker.
One of the services that Habito offers is to find good re-mortgaging offers, a part of the market that some have argued was “really up for grabs” as lenders continue to chase business in a low interest rate environment. However, it was cautioned that none of the new mortgage systems had been tested in a housing crash. “Then it would be a question of the appetite of a bank to keep lending,” said Chris Pearson, regional wealth director at HSBC. “Not a systems issue.”
Adrian Moloney, sales director at OneSavings Bank, says there is an expectation that “Big Data” will be able to help lenders anticipate creditor distress and deal with it in advance. Moloney pointed to customer behaviour on facebook as one source of data on how they are faring financially.
Making much greater use of online data in credit-scoring – particularly to help those who may have found it harder to access some financial services appears to be a growing trend – and it is particularly marked in the developing world where many people have no credit history. However, even in the developed world, more granular online data is being sought to support better lending. The FCA is due to publish the findings of its research into how creditworthiness is assessed later this year and it recently authorised Aire, a startup that generates a credit score for “thin file” clients using online data. Aire is an alumnus of the FCA’s Innovation Hub.