Digital Disruption + Risk Management
Digital Disruption is at the top of every banking and insurance CEO’s agenda in 2017: how to become the disrupter and avoid getting disrupted. Across all credit-driven financial services firms, the pressure is intense with new market players emerging in all realms creating new expectations from customers.
Credit Risk Management and Decisioning are emerging as key scenarios that are ripe opportunities for digital disruption for two primary reasons.
First, the impact of credit risk decision management and compliance is significant to the bottom line and incremental improvements to processes are no longer enabling lenders and insurers to keep pace.
McKinsey reports that, “In 2012, the share of risk and compliance in total banking costs was about 10 percent; in the coming year the cost is expected to rise to around 15 percent… banks are finding it increasingly difficult to mitigate risk…To expand despite the new pressures, banks need to digitize their credit processes.” Top performing firms not only need to eliminate inconsistent approaches to credit analysis that expose them to unnecessary risk. To leap frog, they need to develop a systematic approach based on the integration of new data sources and credit-scoring approaches rather than relying solely on the historical performance indicators.
Second, risk management is, by its very nature, a data-driven discipline well positioned to take advantage of the massive advancements in analytics technologies at the new levels of scale enabled by cloud computing. This is dramatically lowering the cost of all solutions related to credit risk management for small to mid-sized financial services institutions, including FinTech startups that can enter the market quickly with limited barriers to entry.
What is the Opportunity in 2017?
Banks and Insurers can manage increasingly complex data under a higher volume of business rules. At the same time, they can apply an agile management framework of rules and data to take advantage of market opportunities in real-time. This is now possible at a fraction of the cost and time to implement compared to even five years ago. Our partnership with firms like Equifax is paving the way for the next wave of digital disruption in the financial services industry in scenarios like credit risk management and fraud detection.
The Equifax Story
Equifax has offered their leading, cloud-based decision management solution called InterConnect to their global customers for many years. The InterConnect solution “automates account opening, credit-risk decisioning, cross-selling and fraud mitigation during the account acquisition process.”
In 2016, Equifax was looking for ways to help their customers capture new opportunities in their credit risk management and decisioning process by strengthening one of the core components of their InterConnect platform: the Rules Editor.
Equifax’s customers were looking for enhanced support in defining, testing and optimizing business rules. Even more importantly, they needed to rapidly seize competitive advantage through the agile implementation of new business rules and automated optimization strategies based on real-time results, as well as the development of test data for repeated use to enable greater consistency and scale.
Equifax turned to Sparkling Logic as a key partner to fulfill these requirements for InterConnect. Sparkling Logic’s decision management engine powers the enhanced Rules Editor. One specific strategy that was not previously possible was the testing and implementation of Champion and Challenger credit decisioning strategies.
Before Sparkling Logic, customers struggled to compare two or more decisioning strategies at the same time. With Challenger and Champion strategies now enabled in the enhanced Rules Editor, new strategies (“Challengers”) can be developed, tested, and deployed simultaneously with existing strategies (“Champions”). Winning strategies are immediately applied to new decisions after the initial test period. Additional revenue is now captured that would have been lost while you waited for one test after another to play out.
What’s Next? How do you replicate this model to leap frog your digital disruption strategy?
While your competitors are busy applying incremental improvements to their portfolio management strategies and using historical performance data to drive crediting decisions, you have the opportunity to leap frog. This is possible when you immediately capture available revenue opportunity by applying an automated decision management engine to your credit decisioning processes.
Largest P2P Lending Market in the World
Fintech is a hot topic around the globe and China is no exception. The Chinese peer-to-peer lending market is the largest in the world exceeding $150 Billion in 2015. The 2,595 Chinese P2P lending platforms, counted at the end of 2015, have cumulatively brokered 1.37 trillion yuan according to a report in China News. These numbers are particularly significant since they came from true peers, small investors with little institutional money powering the sector.
Challenges of Skyrocketing Growth
Although P2P lending in the US is heavily regulated, Chinese platforms operated without regulatory safeguards until 2016. This unregulated environment fueled growth but also resulted in a significant number of failed platforms (896 in 2015) and in some less than credible platforms defrauding unwary investors.
Another issue facing the industry is the lack of credit reporting agencies and FICO scores that exist in developed markets like the US. According to PIIE (Petereson Institute for International Economics) Chinese lending platforms use alternative approaches such as reviewing bank statements to identify sources of borrowing that don’t turn up in credit records, verifying whether or not a borrower pays his or her phone bill, and in some cases, platforms even send employees to check on physical assets in person.
Decision Management Addresses Challenges of P2P Platforms
Recently Jin Xu, from Sparkling Logic’s Chinese partner, Xinshu Credit, presented at the Global Internet Finance Summit 2016 in Shanghai. Jin Xu discussed some of the challenges faced by P2P lending companies and how Sparkling Logic helps companies, such as Weshare Finance, address these challenges:
- Labor costs, especially for IT engineers, are rising in China. Decision management platforms, like SMARTS Decision Manager, reduce development time and time to market when compared to traditional systems developed using code.
- SMARTS enables business and risk analysts to manage lending decisions with minimal IT support, resulting in a less costly, more agile solution.
- As new fraud schemes continuously arise, SMARTS allows companies to rapidly respond in implementing fraud prevention measures.
- Most P2P lenders require external data to evaluate risk. SMARTS enables the implementation of pre-screening rules to avoid requesting unnecessary and costly external data for ineligible borrowers.
- As data accumulates, SMARTS predictive analytics capability allows companies to extract knowledge from historical data to improve lending decisions.
Weshare Finance, a leading Chinese FinTech company, recently selected SMARTS to revamp its loan processing system. WeShare Finance was founded in March 2014 and is a standing council member of the Association of Internet Finance China. Weshare focuses on providing and cash and installment services to individuals with the motto “mobile inclusive makes life better”. Within 60 seconds Weshare Finance can make a remiitance into a user’s bank account, and is called the handheld ATM of young people.
A little over year ago, Sparkling Logic joined the Fintech accelerator at Plug And Play. We were honored to be selected as one of 29 technology startups (from among 850 applicants) to join the inaugural launch of Plug and Play’s Fintech accelerator.
Plug and Play is the world’s largest global technology accelerator and venture fund with over 350 startups and 300 corporate partners. Plug and Play connects startups to corporations through vertical-specific accelerator programs. The goal of these accelerators is to help startups with funding, acquiring more customers, and fine tuning their business to better match customer demands. In our case, we joined the Fintech accelerator which was focused on financial technology and security. This accelerator was a good fit for us since many of our customers are in the Financial Services industry and are using our SMARTS Decision Manager product for applications such as fraud detection and risk management.
During our time at Plug and Play we have gained new customers and partners. We have also benefited from lots of exposure by presenting to over 80 companies. In meetings and discussions with these companies, we learned more about their needs and where our SMARTS decision management technology can help. This enabled us to refine our messaging and inspired the launch of a new pilot program to help customers develop a meaningful proof-of-value project using SMARTS.
Recently Plug and Play published a blog post and created a video featuring our CEO, Davorin Kuchan. In the blog post and video, Davorin shares more about our experiences during our year at Plug and Play. It will give you a sense of what life is like as a technology startup in Silicon Valley!
It might sound like a philosophical question, but there is a very practical aspect to it that we might not fully realize, when making decisions.
Business Rules execute consistently by nature. We like that. We want that.
There are exceptions though, when we would like to treat a segment of the population differently. We would like to always apply a conservative or aggressive strategy, but we might interpret that differently in different regions of the world, or for VIPs compared to occasional shoppers. Our decision logic is not so black & white after all.
While many organizations start with a simplistic design to address the variations between US and International, or between Gold customers and the rest, or between this and that… This approach does not stand for long. As soon as the number of variations grows, the duplication of business rules becomes a nightmare.
I recall a project that started with a thousand or two business rules. They decided to simply duplicate the rules for each customer configuration in their portfolio. Being very successful at what they do, they ended up with a lot of customer configurations. What do I mean by a lot? What would you say about 1.5M business rules? That was certainly more than the team could handle. As a result, the decision logic was behind, almost stale, as the business rules could not be modified promptly, as you would expect business rules to be. When changing a business rule, they would have to check each and every project to verify that the change was applicable to that customer configuration. A Hellish endeavor to say the least.
Equifax has the same challenge since they provide credit approval solutions to thousands of customers. They would certainly need an army of consultants if they had to duplicate their decision logic across their entire portfolio! In our presentation at BBC 2015, “Exceptions are no Exceptions”, Rex Keith (Equifax Senior Director, Product Management) and I will cover several perspectives related to the problem of exceptions, including this portfolio management challenge. We will also suggest design solutions to each challenge.
I hope that you will be able to join us in Vegas for this presentation.
If you miss us, or if you are looking for more information on this topic, I encourage you to watch our recorded webinar, Managing Complexity in Automated Decisions.