Future of Online Lending

Digital Transformation Imperative

Online Lending & Regulation

Peer-to-Peer Lending & Regulation

Financial Sector Towards the 4th Industrial Revolution

The 10th Annual Conference

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Current Development & Trends

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Digital transformation: a hype, nice buzzword..?

Transformation

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The 2019 Retail Banking Trends and Predictions report combines the insights crowdsourced from a panel of financial services influencers, industry analysts and banking services providers

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Though computers were with us for some decades, the boost is given thanks to couple supply-side factors

Supply side

Exponential rise in computing power, storage

Big Data (ability to capture myriads, cheaply)

Algorithmic Advances

Demand side

Efficiency gain, lower cost, increased sales

Competitive pressure

Regulatory pressure

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In simple words, Digital transformation is…

…ADAPTING AN ORGANISATIONS`S STRATEGY AND STRUCTURE TO CAPTURE OPPORTUNITES ENABLED BY

DIGITAL TECHNOLOGY (HBR, Jul, 2019)

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Digital Doesn’t Have to be Disruptive!!! – it is adaptation rather than reinvention

MYTH REALITY

Digital requires radical

disruption of the value

proposition

It usually means using digital tools

to better serve the known customer

need

Digital will replace physical It’s a “both/and”

Digital is about technology It’s about customer

Digital requires overhauling

legacy systems

It’s more often about incremental

bridging

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Online Lending

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Internet made us even more lazy & demanding

• The primary consumer benefits of a digital lending solution are the interrelated components of simplicity, convenience and speed

• Today’s digital banking consumer has an insatiable need for immediate gratification.

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“Financial institutions today are seeing a rapid change in the channel equation. The percentage of applications received via branch and call

center is diminishing while the digital channel is growing rapidly. Lenders today must develop quick to market strategies that help them position as a digital lender or risk losing to other lenders who innovate quicklyKyle Kehoe, President of the ACTion Business Division at CRIF Lending Solutions

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Banks are lagging behind alternative lenders (non-banks)

• Transforming digital delivery capabilities is hard

• BIG legacy is key challenge for the bank to successfully implement digital transformation strategies

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Rise of Alternative Lenders• Alternative lending refers to a growing

array of digitally based lending platforms that serve various segments (consumer, auto, mortgage, SME, student).

• These firms leverage technological innovations to simplify and expand access to capital.

• Alternative lending organizations provide end-to-end loan experiences through online, mobile and hybrid channels, from application and origination to underwriting and servicing.

• The efficiency, scalability, reduced cost and digital capabilities provide clear differentiators to consumers compared to traditional banks, which could take multiple days/weeks to process a loan

Digital Consumer Lenders:

Peer-to-peer Lenders:

Digital Business Lenders:

Point-of-sales Lenders:

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Key strengths of Digital Lenders• Simplified processes and fast access to credit

• Greater access to credit, meet unmet needs and target underserved segment – 2-3 bln of underserved

• Leveraging on mono line business model

• Easiness in scalability

There are Data Attributes Differences in Traditional and Disruptive Model

Traditional Disruptors

Credit Bureau Data In addition to traditional (but sometimes even without traditional…)

Risk-score (FICO) Social Media Activity

Proof of Income Psychometric

Proof of Employment Behavioral data

Zip code/address Advanced predictive models using AI, deep and machine learning (so-called

Big Data Underwriting Algorithms)

Asset ownership

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Regulatory Policy: ”The Embracer” Approach• Welcomes and embraces digitalization of the sector

• Welcomes and embraces the market entry of alternative financial services providers as they exert competitive pressure on incumbents leading.

• As there is clear positive welfare increase due to decrease of transactional cost and in general better service offered

• Should take a proactive stance in promoting the digitalization of the sector

BEST EXAMPLE so far where the Regulator’s effort opens up the market is PSD 2

“2018 is set to be a game-changing year for retail banking. As the PSD2 (Revised Payment Service Directive) becomes implemented, banks’ monopoly on their customer’s account information and payment services is about to disappear. The new EU directive opens the door to any company interested in eating a bank’s lunch.”

https://www.evry.com/en/news/articles/psd2-the-directive-that-will-change-banking-as-we-know-it/

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• The new technologies, new business models bring uncertainties, that might challenge financial stability

• Regulators reaction: they came up with Regulatory sandbox

• Extract from Financial Conduct Authority (https://www.fca.org.uk/firms/regulatory-sandbox)

“The regulatory sandbox allows businesses to test innovative products, services, business models and delivery mechanisms in the real market, with real consumers.

The sandbox is open to authorised firms, unauthorised firms that require authorisation and technology businesses. The sandbox seeks to provide firms with:

• the ability to test products and services in a controlled environment

• reduced time-to-market at potentially lower cost

• support in identifying appropriate consumer protection safeguards to build into new products and services

• better access to finance

The sandbox also offers tools such as restricted authorisation, individual guidance, informal steers, waivers and no enforcement action letters…”

Regulatory Policy: ”The Balance” Approach

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Balanced regulation achieves results for consumers and regulators – Price caps, applied to high cost short-term credits

Martin Wheatley, CEO, UK FCA on 2014 regulation:

I am confident that the new rules strike the right

balance for firms and consumers. If the price cap

was any lower, then we risk not having a viable

market, any higher and there would not be

adequate protection for borrowers.

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Areas in Digital Lending calling for Regulator’s attention• Identification (refers to all non-face-to-face)

• ID uploads, video call, OCR technologies

• 3rd party verification (requires integration)

• Digital Identity

• AML/KYC consideration

• Our case: Goodcredit is the 1st regulated financial company in Armenia that deployed FICO® TONBELLER® Siron® solutions for anti-money laundering (AML) and know your customer (KYC) in both online and offline lending processes

• Contract signing – depends on general level of legal framework and available technological infrastructures (eSignature, 3rd party authorization, digital identity)

• Data Privacy (refers equally both to online and offline)

• Marketing, communication, disclosures, disclaimers

• Responsible lending (refers equally both to online and offline)

• Pricing as well debt collection principles (both online offline)

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Responsible Lending as core value: Self discipline vs Regulatory compliance

• Goodcredit is digital finance business that combines the

discipline of a rigorous, highly regulated consumer lender

with the capabilities and drive of a fast-paced, data-driven,

borrower-focused fintech.

• Taking action to put customers first, and seek to deliver

good customer outcomes

• Tightening credit policies to ensure we only lend to

people who can afford to pay us back

• Broadening use of risk based lending limits

• Creditworthiness assessment, voluntary solvency

checks

• Additional predictive variables in our scorecards to

better assess affordability

• Working to ensure customers have safe landings

when they signal difficulties.

• Ensuring deep and meaningful regulatory relationships

• What does responsible lending mean to Goodcredit?

• Marketing: clear, simple and transparent products

and terms

• Pricing: typically position rates at lower end of market

to ‘self select’ responsible borrowers who ‘shop

around’

• Underwriting: credit check and underwriting for ALL

loans, including returning, with 30% average new

customer acceptance

• Customer care: local language, well staffed and

responsive teams

• Repayments: “push” payments from customer to

4finance/Goodcredit, no automatic withdrawal from

bank accounts

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This Photo by Unknown Author is licensed under CC BY

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Peer-to-peer lending

“The Bright Side”

“What is peer-to-peer (P2P) lending?

Peer-to-Peer lending enables investors to lend funds directly to borrowers via an online platform. Retail investors access a platform to provide loans to consumers or small business borrowers. Whilst platforms facilitate the

lending, undertake credit assessments and other risk management, they do not act as a counter-party to the loan, and contracts are direct between the investor and the borrower.

For borrowers, P2P brings additional choice and competition in the lending market. Interest rates offered are typically at least as good as rates on loans provided by banks and other lenders, but customer service levels, speed and responsiveness are acknowledged to be significantly better.

For investors, P2P lending provides a new investment choice, with levels of risk and return that sit between lower-risk/lower-return banking savings accounts and higher-risk/higher-return equity investments (including equity crowdfunding, which is generally regarded as representing a higher risk than peer-to-peer lending).” source: https://www.p2pfa.org.uk/

The sector grew rapidly in the wake of the financial crisis with the encouragement of regulators and politicians, as an alternative financing to SMEs (especially) at a period of credit crunch

Personal LoansSmall Business Loans Asset-backed loans

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Zopa created peer-to-peer lending back in 2005 & is Europe’s largest P2P lending business. Zopa has lent

more than £1.2bnm & returned over £60m in interest to its lenders. Zopa has over a 2% market share in UK

personal loans & has helped over 250k consumers get a better deal on their money. So far, over 60k lenders

have trusted us with their money to earn great returns & over 150k sensible borrowers are currently using

us to get a low-cost loan.

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Seems like typical “Boom & Bust”

Core idea of P2P:

• There are good borrowers that banks cannot serve well because of high overheads, clunky technology and rigid regulation

• But tech platform can connect those borrowers with investors starved of yield in a world of low interest rates

• And the platforms themselves are capital-light business, charging fees for originating and servicing the loans while taking no direct credit risk — a formula for high returns

!!!BUT

• Only a few marketplaces have achieved profitability, and only just

!!!Main Reasons

• Fallacy: “They could beat the banks at their own game due

advanced technology” – bad rates are high, though getting better

• Borrows are too expensive to be acquired – marketing 40% of

revenue

• Investors seek higher returns due to higher cost of capital vs.

banks

• Governance issue

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Industry Outlook

Threat: Banks do have 2 major advantages (structural) – cheap funding and ability to leverage

“If the banks could get out of their own way” — developing efficient small-loan origination technology — their economic advantages would crush the platforms, one fintech investor says” source: ft.com article “Failed

promise of marketplace lending faces a new test”

So to survive the answer is simple – in every industry where cost is problem, the SCALE is the solution

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2 high-profile bankruptcies in the last 6 months in UK

• offered loans against classic cars and Picasso paintings, has become the second British peer-to-peer lender to collapse in six months (just last week, Oct 23) - #3,500 investors being exposed

• allowed retail investors to fund property development loans, was put on an FCA watchlist in January, out GBP 160mln 55% of loans we re not performing, now in administration

• Governance scandals in Lending club and Sofi, that pushed our their CEO

Peer-to-peer lending

“The Dark Side”

!!!Obviously the Regulator has to react!!!

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Core problem: Customers were being lured into high-risk products without fully understanding them!!!

The FCA is attempting to clamp down on poor practices in the peer-to-peer sector after finding that many investors did not understand the risks involved in funding loans. New rules to improve advertising and corporate governance standards will come into force this December.

Some of the principles:

• Investors would no longer be able to put more than 10 per cent of their investable assets into peer-to-peer loans unless they had received regulated financial advice.

• Companies would also be required to give better information to customers and test their knowledge and experience of investment if they had not received any advice

• Explicit rules on risk management

• Improved corporate governance

• Marketing, communication

Peer-to-peer lendingUK example: “The FCA”

Christopher Woolard, executive director of strategy and competition at

the Financial Conduct Authority, said: “These changes are about enhancing

protection for investors while allowing them to take up innovative

investment opportunities. For P2P to continue to evolve sustainably, it is

vital that investors receive the right level of protection.”

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Landing page at top

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Landing page at top – one would need to scroll really down to get to the disclaimer