The Future Of Lending

Part 1 | Improving Consumer Confidence In The Use Of Their Bank Data

October 22, 2019 The ID Co. & LSB Season 1 Episode 1
The Future Of Lending
Part 1 | Improving Consumer Confidence In The Use Of Their Bank Data
Chapters
The Future Of Lending
Part 1 | Improving Consumer Confidence In The Use Of Their Bank Data
Oct 22, 2019 Season 1 Episode 1
The ID Co. & LSB

In the world of Open Banking and FinTechs, and with the speed of technological change affecting the financial industry, how can consumers be confident in how their data is being used and who is using it? What can financial services firms, traditional banks, lenders, FinTechs and intermediates do to improve consumer confidence?

The success of data sharing through technology is dependant on consumer engagement, whether it is personal consumers or SMEs. One of the reasons organisations cite for consumers not engaging, or having concerns about Open Banking, is their fear around the use of their data. Are these fears founded and what can the industry and individual firms do to improve consumer confidence in the use of their data and Open Banking?

James Varga, CEO of The ID Co., joins Harry Hughes, Senior Insights Manager at the Lending Standards Board, sit down to discuss all this, and more, in our two-part podcast.

Show Notes Transcript

In the world of Open Banking and FinTechs, and with the speed of technological change affecting the financial industry, how can consumers be confident in how their data is being used and who is using it? What can financial services firms, traditional banks, lenders, FinTechs and intermediates do to improve consumer confidence?

The success of data sharing through technology is dependant on consumer engagement, whether it is personal consumers or SMEs. One of the reasons organisations cite for consumers not engaging, or having concerns about Open Banking, is their fear around the use of their data. Are these fears founded and what can the industry and individual firms do to improve consumer confidence in the use of their data and Open Banking?

James Varga, CEO of The ID Co., joins Harry Hughes, Senior Insights Manager at the Lending Standards Board, sit down to discuss all this, and more, in our two-part podcast.

Harry Hughes:

Hello and welcome to The Future Of Lending podcast. I'm Harry Hughes, the Senior Insights Manager at the Lending Standards Board. This podcast is an occasional series brought to you by the LSB and The ID Co., a FinTech based up in Edinburgh Scotland. For this episode, and future ones, I'm joined by James Varga, the CEO and founder of The ID Co. where we look to answer some of the main questions facing the financial services sector specifically to do with financial technology and the future of lending.

Harry Hughes:

Brilliant. So James, thanks very much for, well, for allowing me to join you up in Edinburgh.

James Varga:

Thanks for, thanks for coming along, it's great.

Harry Hughes:

Yeah, and hopefully this will be the first of, uh, I won't tie you up with many, but a but a few at least, um, podcast where we can sort of share, share some ideas and debates that we're hearing, um, at the lending standards board from our registered firms. Um, and from around the industry. Um, one of the first questions that we sort of had and we hear quite lots about is, uh, firms having been worried about, um, customers, um, wanting, to share their data and feeling that they sort of, that customers aren't willing to engage in this, in the, in the way that we'd be most prudent in terms of sort of open banking and digital technology. From what I understand about your view on that is it's more about, it's you sort of flip the question and say is it's actually the product, the product should drive the, uh, be so useful the customer wants to, to share and use it. Is that, is that right?

James Varga:

Absolutely. I mean, one of the big lessons over, over the years of working with bank data, it's all about context at the end of the day. Um, and for a long time, I don't really use it anymore, but for a long time I used to always give the example of somebody asking you for your name, address and date of birth. Right. And how, you know, we're pretty pretty comfortable giving that online. But out of context, walking down the street and me bumping into you, I'd probably, you've probably wouldn't give that to me. Right. And it is the same thing around bank data. It is more sensitive and that it's very personal to, to consumers. Uh, there's a lot of value in that data and you want to be, um, respectful of asking people for that data. But on the other side, if you do flip the question around and you do like a what, what's in it for the individual. With a strong use case, people will share their bank data, you know, and actually in financial services taking out a mortgage or, or, or refinancing your kitchen, a lot of times consumers have been asked for bank statements anyways.

James Varga:

Open banking is just a digital version of that. But if you don't think about the context and the use case, it can be difficult. If you do think about the context and what's in it for consumers especially, as one of the lessons we've learned is, uh, convenience is the biggest motivator. If you can offer convenience in exchange for sharing that data, then the vast majority of people will do it. You know? Um, things like security and privacy is important to people. Absolutely. But it's not, it doesn't change behavior, consumer behavior. It's convenience, that that, uh, is a fantastic motivator to get someone to, to share this, this wealth of data they have.

Harry Hughes:

Hmm. Yeah. And as you say with this sort of the mortgage example, an interesting one, if you're having to share bank statements going back three years or something, say, if you want the mortgage, at some point you're going to have to do that. It's just depends whether you want to do it essentially easily, or print everything off, have to go in branch. Whatever it is.

James Varga:

Absolutely. Absolutely. Again, it's that convenience and that value. Um, not that that's the only benefit, but that's a great place to start is, you know, would you like to do this in a digital way? Share a read only copy of your bank statement, not give away all your financial data. That's not, that's not what anyone's asking people to do. It's, it's sharing a read only a digital version of your bank statement. So why wouldn't I do that through my bank account quickly and easily. Uh, and when it does come down to privacy and security, actually I feel better doing that online with a bank system or a lender system, than, you know, sending in the post a copy of my bank statement to some, some call center through the Royal Mail. Actually I feel more uncomfortable doing that than, than, than sharing a digitally, and not everybody does. But you know, I think a big part of the population would, would agree with that.

Harry Hughes:

Mm. Yeah, absolutely. There is an irony there around the sort of safety of that. Uh, how sort of um, uh, sort of explicit could you be or would you be in terms of the benefits of it? So to use the example we're saying about it would be faster because we can access it, you don't need to bring it in, is kind of clear cut. But if you had, say, a product like a loan, um, consumer offering like that and you could, would you ever be a, as explicit saying, we can make it, give you a cheaper loan by you sharing this data or as, what's the sort of thoughts and ethics around it?

James Varga:

Yeah, again, it depends on the use case and the product, and the service, and who you're offering it to. But you know, um, let's throw some examples on the table. Say, say someone's just moved to the country, right? Or say a student has just spent seven years studying law in university and they graduate, they get a decent job and they go get their first car loan, but I've never taken out credit in their life. You know, and that sort of situation, a lot of those people are disenfranchised because they're not able to go get those, those products and services. So if you gave me a choice of connecting my bank statement to get that car loan, I would probably be happy to do that.

James Varga:

In the same sense would I'd be happy to get a car loan, not at 20 or 30% but 8% or 9% if I share my bank statement probably. Yeah. So giving a choice is fundamental. You know, making it mandatory becomes a scary thing for consumers. Finding out what the benefit to them is and then layering that into the call to actions and the conversation that people are having with the consumers. Absolutely beneficial. And just give people a choice. Right? Give people the choice to go, actually, if I do share this data, could I get a personalized interest rate? You know, not a 30% on a credit card, but a 10%, I probably would, you know, because I want that benefit.

Harry Hughes:

Mm. And do you think over the sort of last, um, well I know you've been working in the space for, you know, considerable amount of time and the, has it been, I'm assuming there has been obviously an improvement in the types of the products and the, um, the sort of the scope and number of them. Um, but do you think there's been an improvement in terms of the communication that goes out to customers about what the benefit is and what sharing data can do and what that means for the end customer?

James Varga:

Well, I think at one level we've only just scratched the surface. We've only just started now that open banking is there, it's launched, it's live, people are starting to use it. The, you know, if you look at the stats from the Open Banking Implementation Entity, the API calls are going up every month, but it's still relatively low on the overall numbers. Uh, and I think as an industry, this really comes down to the, the current challenge. How do we build products and services that benefit from, from bank data, from, from open banking. Uh, and I think we're just starting that journey just now. So far we haven't quite realized how to really maximize the benefit of, of open banking. Uh, that's a journey that's gonna take years. You know, cause we're just not used to using this sort of data in these lending decisions where we're more used to using the credit reference agencies and bureaus and credit scores and the sort of more traditional checks and balances that are, uh, that are there. So, um, I think is going to be a while before we really maximize that benefit.

James Varga:

But what we're seeing in the market, thanks to some of the digital banks, the neobanks, the Starlings, the Monzos, the Revoluts and the N26s of the world, is a resetting of expectation around consumer experience and customer experience, right? The, the, the sort of value that convenience has and the, the value that the customer experience overall can, can play in the market. And I think best starting to shake up the industry now it's starting to get people, especially at traditional banks, but it's getting the industry to realize that maybe we should improve these things. Maybe asking people to jump through the hoops that we've always asked them to do, to come into a branch to, to, to just be given that car loan at 30% because that's what we do and there isn't any other data, so let's not change a type thing, that's coming under pressure. Uh, and it's really exciting. It's exciting to see things start to change for us to start to reimagine what that, that overall journey or that, that value proposition that experience should be for somebody.

Harry Hughes:

And it's really interesting what you say about how it's just the start, because especially in the, I think some of the, some of the press that you read sort of outside non, outside of financial services, there seems to be sometimes a feeling of oh well it's been in place a couple of years now and this hasn't, you know, as if it should be the end point rather than the beginning of that data sharing and beginning of firms being able to sort of work together as it were.

James Varga:

Well then there's one thing about the data being there. There's another thing, there's another level where it's now at the maturity or starting to get at the maturity, uh, where people can really start feeling comfortable to use it. And that's, that's multifaceted. I mean that's having the support from the regulators, uh, the FCA last November, I think it was November 3rd saying that, you know, firms need to do better affordability checks is a great example of that. Why? Because yeah, you shouldn't, you know, make sure someone could afford the payments and uh, they're not going to overstretch themselves, they're asking for the loan for the right reason.

James Varga:

A core part of that is, you know, income. Does somebody have a job? Where do they spend their money? Do they have enough discretionary income or disposable income to to make those payments? And for the, the regulators to cite open banking as one of the, the options for dealing with that opens the door for a lot of credit risk officers and compliance teams to go, actually maybe we can use open banking. I think that regulatory pressure, the maturity, the API and some of the data that's now there, account holder name, and that not being in the industry through those APIs, has been of a hurdle I think for a lot of lenders. You know, because their traditional processes are predicated on having a name, address and date of birth. So they want to match it all up with uh, a name.

James Varga:

I don't necessarily believe that you have to have the name there. I think a bank statement tells you a lot about somebody with, without having a name, but it's building those bridges between, you know, what's always been done and what we want to do in the future. And the more we start to use it, the more we'll understand it and go on this journey of using bank data and figuring out where the real value is.

Harry Hughes:

And to use the underwriting example it's, it's perfect, one of those two sides where it's great for the businesses cause you can get better underwriting and therefore better, write better loans. Um, but also for the customer, being able to sort of apply much more simply, be able to have one sort of source essentially of their personal data that's updated rather than having to fill out every time you go through the process.

James Varga:

Absolutely. And there's, there's a huge opportunity for the likes of the, uh, price comparison sites, you know, that kickoff a lot of these processes. The, the bigger banks, the smaller banks, the credit unions, the individual lenders, you know, bank data in these processes can, can have a, a massive, uh, impact.

James Varga:

Um, and it's interesting what you were just saying too around the, you know, the customer and the education I guess is always been a big talking point. Do we need to educate consumers? Yeah. Uh, and I've always been schizophrenia cause you know, I know I'm really close to the topic. I know I live and breathe this whole bank data, I'm pretty desensitized towards it. But when we go out and talk to people, when we work with our customers to try and get people through that process, get them to connect their, their consumers, their applicants to connect their bank data, it really comes down to call to action, and convenience more than anything else.

James Varga:

So I don't, I don't, I don't, um, necessarily agree that we have to educate consumers. I think it's, uh, more like 5g, you know? It's there. People might be aware of it, but it's the impact that that has, that'll get people to upgrade their phones,

Harry Hughes:

People see their friends using it and it's faster. So you sort of...

:

Exactly. You know, faster, easier, more convenient internet. I want my movies to download quicker is why I'll get a faster phone for 5G. Otherwise, you know, it's just, uh, it's just two letters, you know, it doesn't really mean anything to me as an individual. Um, it's that convenience, that experience that makes, makes the biggest difference.

Harry Hughes:

So one of the things that we've heard in terms of questions from sort of industry, being unsure about, being unsure about the future is exactly that in terms of the education. And questions, on whether the industry as a whole should actually be working together.

Harry Hughes:

Your answer would be presumably based on you're saying no, cause it should just be around. If you concentrate on the product, the awareness is coming out of that because people are interested in what's going to benefit them essentially.

James Varga:

Well yeah. And, you know, always personalize it as well. You know, would you like, would you like the convenience of getting a car loan at a personalized interest rate five minutes before you walk into the dealership, or you happy to go into the dealership and then they get the car loan afterwards. You know, actually how do we empower the individual, how do we create these, these better experiences? How do we put people in more control of their data, I think is a stronger message than, um, look, there's this whole thing called open banking, all supported by the government. The a PSD2 the payment services directive has two big components, one is account information services. So if you have... You know, none of that makes any sense to, to somebody walking down the street, you know. It's, it's...

:

And it's unnecessary really, for the, for the end consumer as well isn't it.

James Varga:

Yeah. And everyone, you know, as much as we, we hate banks, everyone trusts banks at the end of the day, I mean we put our money in banks and these services. Um, we have to trust that the regulators and the industry is there to provide a certain amount of confidence to consumers. And, referencing open banking, absolutely, it can be, can be a helpful thing. There's some work being done right now on trust marks and, and trying to understand what the big value, or sorry, if there is a big value with trust marks in to those experiences and whether that helps conversion and whatnot. Um, our experience, you know, having again worked with bank data for a long time and, and even well before open banking, is that we can see conversion rates 60, 70, 80%, which is incredible, even before open banking comes along. And with open banking, it's just a, a step change from, from that.

James Varga:

So with a well constructed offer, experience, benefit to the consumer, then then people will connect their bank account. And if they do and then the business benefits as well. And the impact to the industry, which is really where this drive should come from is how do we give safer, better, easier loans? Uh, the impact of the industry is, is, is even more beneficial than, than that of a consumer. It's one of the reasons why we focuse on customer onboarding and credit risk decisions in lending, because it does have a benefit on both sides. You know? Absolutely. The user experience can change as a, as a consumer to get a 30 second loan or mortgage would be fantastic. Next time I remortgage instead of it taking two months, I would love for it to be 30 seconds, right? I mean, that's what I want.

James Varga:

But as a business, if we can help reduce fraud and increase conversion and reduce the, uh, delinquencies, the collections recovery process and streamline remove costs out of that process, then the big question is what can the business do with that? You know, could it spend more time helping the consumer because they're spending less time just onboarding the consumer. I mean, that would be fantastic in itself.

Harry Hughes:

The point around the, what you were saying around if you could have a sort of, appreciate this is an example, but a sort of 30 second loan, and that seems to be, you know, that is the goal as it were for, a lot of businesses. Um, one of the conversations we've been involved with is around how'd you build into a seamless journey, sufficient friction points to make it so that a customer is actually, you know, having to think around, about a decision that could be impactful. You know, if you're taking a 5,000 pound loan out, should a customer should they be able to do it in, you know, a couple of minutes? Or rather should we be putting in place, sort of brakes and friction points to make them consider it more deeply?

James Varga:

So absolutely. I think we have to be appropriate and these are leavers that we, we, we have to pull in that customer onboarding and that origination process. I do think though, a lot of the friction that exists today can be removed, which will allow us to put back into that process the right sort of friction to make people aware and think about it.

James Varga:

Let's take a mortgage as an example, right? Most of the hassle and the effort is going into branches is filling out affordability checks on how much I spend on where and travel and all the rest of it. So there's a lot of friction in these processes already, but it's the wrong kind of friction, right? If there wasn't that sort of friction, which meant it was 30 seconds, then absolutely make it a couple of minutes, spend a minute and a half, making sure that I understood what the implication of it was, the personal effect, how it's gonna affect my finances. Actually you can use bank data to replay back into the consumer at a very personal level, personalized level, what the impact of this, this lending decisions gonna make for them, but still keep it really easy compared to what we do today. Cause I think this is part of the challenge isn't it? I mean as that one click checkout sort of benefit that PayPal model, the Amazon checkout, you know, these are all really good examples of, of where convenience can be such a, a strong motivator.

James Varga:

But if we can alleviate that inconvenience, that friction and put back into the process, the right sort of friction where we're educating consumers, then, then overall a gain is better for the individual. And that's, that's, that's absolutely, uh, related to the type of product that you're selling. I mean, 5,000 might be easy for me, for someone who is financially distressed or vulnerable, it might be a lot of money. So show me the impact. I mean, it would be great to see, to see more of that happen in the, the 30 second consumer lending experience, especially in the subprime sort of categories is what is the impact that this is gonna have on my financial situation and my cashflow, my available spend. And, and use the connecting the bank account as a, an opportunity to illustrate that for users.

Harry Hughes:

Yeah, that's a great point. Cause then you have, all things being equal, you'd have, yeah, you have it much faster and you're building those friction, but your underwriting's a lot better. So you're already more confident that they can afford it. And also, I'd not heard that before, that you could essentially project to the customer, this is how much you have at the end of the month, minus the loan. This'll be, you know, this is what it's gonna look like and give them a clear idea. Is that what you're...

James Varga:

Absolutely. Absolutely. Why not? Why not go to that level with it? Why not create the experience that, uh, is fronted by the bank statement? You know, where the consumers are put in control of these decisions for, for all the reasons I think you just intimated. You know, it's that having the right friction to make people think and understand what they're doing and the implications of, of signing up to that four year lease or whatever it is. You know, that's a, that's a, that's a decision that's got a lot of responsibility and unfortunately consumers just aren't financially aware generally in order to, to connect that all together. Um, you don't have to build a personal finance management tool to do that. You could just say, connect your bank account, we'll give you a personal rates maybe even some options for me as a consumer, you know, in the car lending example. What is the term? How many years? And how much do I want to spend every month? And how, how much less money I'm going to have at the end of the month.

James Varga:

That's what consumers need to know, right. It's not necessarily the obligation on T's and C's and contract is the implication of making that decision. And why couldn't that be fronted in that process, you know, so that you're taking that, that right friction and putting it right up at the beginning, but in a way that empowers me as a consumer, which makes me feel great. I'm in control and I can help make a decision that's, that's more suitable to me. At the same time the lender then then reduces the risk as you say overall of the rest of the process, the execution side of that.

Harry Hughes:

I suppose as you say that just going to, you know, a branch to use our previous example isn't actually, sort of, helpful friction because it's just annoying, but the customer's not necessarily thinking about, um, the process or the actual loan during that time.

James Varga:

I think we'll start to see more and more uses, use cases come out where products are being priced for the individual. I know there's a regulatory, kind of compliance challenge, to wrap your head around how much of that do you do and not do and how personalized do you make some of these decisions. But, um, I mean, I'm a big, big proponent of that. I think it's great to put consumers in control of some of these decisions and experiences.

Harry Hughes:

Yeah. And it'd be really interesting to see, you know, sort of on the backend as well, the success rates of those, cause that's obviously something that the banks and other lenders would be able to see as well, is where you'd be able to compare the, you know, where you've had engagement at the frontend and what the results in terms of defaults and the like are.

Harry Hughes:

Thank you for listening to part one of The Future Of Lending podcast and we will be back with part two shortly.