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Alternative Data & Financial Inclusion for a New Generation

October 4, 2019

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Why it’s important to get the basics right – 5 steps to success

Evolving consumer behavior, technological advancements, volumes of data and new lender typecan all be daunting. Managing these factors often requires unwavering focus. Here, we’ll peel back the layers of these often-distracting elements and share our secret to success in five steps.

Credit Invisibles…No Track Record 

Individuals often find themselves in this position because they choose to live within their means and save for their futures.  However, when it’s time to finance their first car or apply for a mortgage many find they are unable to access credit because they do not have a financial track record that can be verified by a traditional credit search.  Consequently, some consumers are being forced down the sub-prime route while others are being excluded altogether.

This is not a new problem, but it may worsen as the next generation of borrowing customers comes of age.

Talking About the Z Generation: Credit Averse

Generation Z (born between the mid-1990s and early 2000s) is characterized by an aversion to credit, having grown up in the economic shadow cast by the 2008 global financial crisis and the heavy burden of student debt.

According to the FCA, Generation Z is the working-age cohort least likely to have debt of any kind, and many will find that even today it is hard to get credit if they have never had credit. 

New Borrowers Bring Opportunity to Lenders

But this apparent Catch22 presents a significant opportunity for lenders 

The answer lies, in part at least, with the use of new and alternative data in risk assessing your customers.   

For example, as of 30 April 2019 the UK average renttoincome ratio stood at 30.8%.  Clearly, rent payments make up a significant proportion of household expenditure. It follows that an applicant’s payment track record and any rent arrears are valid components of any affordability assessment, particularly when considered against the backcloth of sustained growth in the private rented sector. 

Experian estimates that around 75% of tenants move to higher score bands after rent payment performance is considered. 

Increasingly, credit scorecards are taking account of rent and other indicators such as utilities payments, insurance premiums (and level/type of cover) and subscriptions to build an accurate profile of an applicant’s lifestyle and probability of default. 

Real-time Analysis of Massive Data

Open Banking and the rise of AI and Machine Learning have paved the way for fintechs to analyze and categorize huge volumes of bank account transaction data in real time.  This exponential growth in processing power is the key to financial inclusion for many underserved segments of the market. 

For example, research published by the University of Hertfordshire in June 2019 shows that the UK’s booming gig economy has more than doubled in size over the last 3 years and now accounts for almost 5 million workers.   

In the context of a loan application, this typically manifests in frequent small account credits rather than a regular fixed salary payment. Access to the data and processing power to identify these deposits and categorize them as income makes it easier for lenders assess credit and, crucially, has the potential to bring this significant – and growing – cohort into the mainstream.

What Does this Mean for Lenders?

Changing socio-economic factors are only one component of a constantly evolving landscape for lenders.  The pace of change is relentless – consumer behaviors and expectations are evolving while new technology is providing the catalyst for structural change across the financial services industry.

We see increased competition for incumbent lenders from a new breed of agile, digital-only Neobanks who are unencumbered by legacy technical infrastructure.  Increasingly, however, we are observing a trend towards banks and fintechs forging new partnerships and building a “best of both” model to respond quickly to new opportunities.

Simply keeping up with the latest developments presents its own challenges and lenders may become distracted by exciting new technology and the push to get to market ahead of the competition.

That’s why at Bridgeforce we understand the importance of taking a step back and applying our years of real-world experience to help clients achieve their business goals.  Whether it’s leveraging new technology, exploiting niche market segments, partnering with established fintechs or launching innovative products, we believe these 5 areas of focus are key to your success:

5 Steps to Success

1. Return on Investment – Develop a Compelling Case

All change projects are in competition for limited investment budget and need to create demonstrable value for customers and shareholders.

We can help you create a compelling investment case by articulating financial and non-financial benefits and demonstrating how these will be realized and tracked post implementation.

2. Partner Selection – The Right Process and the Right Fit

“Artistic differences” are often the root cause of failed collaborations, so choosing the right partner is essential.

Bridgeforce has extensive vendor selection and oversight expertise.  We can manage the RFP process and work with you to develop selection criteria and a custom scoring matrix.

We also understand the importance of finding the right cultural fit for your organization and will work closely with stakeholders to define and identify the right partner.

3. Target Operating Model Remains Relevant and Fit-For-Purpose

To maximize the benefits of your investment, it is imperative to consider how it impacts the wider organization.  We leverage our deep operations management experience to make sure that your operating model remains relevant and fit for purpose:

– Do you have the right blend of skills in the right locations or do you need to re-balance?
– How does the planned change affect roles and responsibilities, which teams are affected, have they been consulted?
– Do colleagues understand the change, do they know how to use new technology, can they explain it to customers?

4. Customer Journey – Keeping up with the GAFAs

The GAFA group (Google, Amazon, Facebook, Apple) has set a very high bar and consumers have come to expect a similarly frictionless experience from their banks.

Bridgeforce can help improve customer experience and engagement by deconstructing your customer journey to understand change impacts and eliminate pain points.

5. Disciplined Approach to Change Management for a Frictionless Process

All change projects require robust planning and control.  The tried and tested Bridgeforce methodology provides:

– Clear rules of engagement
– Visible milestones and critical path
– Change controls
– Risks and issues management and escalation
– Governance and reporting protocols
– Business readiness assurance
– A clear BAU migration path, including benefits ownership and tracking

We Get It and We’ve Done it – Let Us Help You

At Bridgeforce, we have deep competency in transformational change, retail banking and risk.  Because we understand the practical application of new technology – as well as its relevance to your customer proposition – we are adept at joining the dots between internal Product, Risk and IT teams and external service providers to ensure that any solution creates tangible value for our clients and their customers.

If you would like to discuss any of our services or how we might be able to support your change journey, please contact us.