Vlad is Flinks' Former Head of Sales - US. He helps business leaders innovate with financial data—and that has given him a front row seat to the transformation of finance for more than 15 years.
COVID-19 and the Race to Reduce Losses on Loans
Lenders and banks prepare for an expected wave of COVID-19 related defaults in 2020 and 2021. Some have started putting aside massive loan-loss reserves — but not every business has access to that kind of financial resources.
In this race against the clock, lenders that take a data driven approach will reduce their exposure to losses and build more resilient businesses.
The wave is coming
Over the past few months, the shut down and progressive reopening of the economy has led to an unprecedented loss of jobs. There’s no reason citing current unemployment rates, they will have increased by the time you read this.
This is important, because for years consumers and businesses have enjoyed low interest rates.
Record levels of debt put borrowers in a vulnerable position as their income takes a hit from the recent economic collapse.
So far, the impacts have been mitigated by temporary measures. Relief programs such unemployment benefits and stimulus checks have been effective to supplement lost income. Consumers have cut non-essential spending. Banks have granted pauses on certain loans payments while the economy was in lockdown.
Even then, we are seeing early signs of what’s to come. Around a third of households in the US have not been able to make their full housing payment in May and June — and July is shaping up to be no different. One economist predicts US consumers could face income losses of up to 70% without unemployment assistance.
This is the context that saw banks and other financial businesses recently set aside billions of dollars to cover expected loan losses. The signal is clear: lenders should prepare for a wave of COVID-19 related defaults in 2020 and 2021.
The situation isn’t dire yet. By and large, borrowers are still able to make payments on their loans, thanks to government assistance keeping them afloat.
However, if relief measures roll off without a significant recovery in employment, experts expect trouble ahead — both in the US and Canada.
Where do we go from here
We are now starting to realize just how much economic uncertainty COVID-19 is creating.
While a wave of defaults looms on the horizon, lenders must also face another pressing challenge. It’s becoming ever more complicated to determine creditworthiness of new customers. Sudden changes in employment and income situations, as well as payments deferrals, aren’t necessarily captured by traditional means of reporting.
Lenders are looking for new ways to assess risk and act accordingly.
The pressure to reduce losses on loans while maintaining operations highlights the importance of taking a data driven approach that makes a smart use of consumers’ financial information. To survive now and thrive in the post-COVID economy, the time is ripe to become a fintech.
Rethinking credit risk
The current context calls for more efficient and better adapted forms of credit risk analysis.
Transactional data captures your customers’ short term financial trajectory, allowing you to determine who is safe and who is in trouble with great accuracy.
In big-picture terms, a potential borrower’s transaction history provides a set of comprehensive and up-to-date data points on what they earn and spend, where and when.
To make this more concrete, let’s take a look at two different ways our clients leverage this information in their credit decisioning process.
- Augmentation. Lenders with manual underwriting use reports we generate from their customers’ transaction history in addition to reports from credit bureaus. So, for instance, their underwriters take into account trends and data points on employment and non-employment income, free cash flow, loan payments, and a number of other categories relevant to their risk analysis.
- Full automation. Other lenders have updated their risk analysis models to use raw or enriched transactional data as inputs. This allows them to automate their process for instant decisioning, and use the data to fine-tune their models over time.
Ongoing monitoring of your portfolio
In lending, the financial health of your business might be tied to the financial trajectory of your current customers. So, how are they reacting to the current situation? How many are at risk of defaulting on their loans?
Over the last months, we’ve helped clients leverage the constant feed of data from their customers’ bank accounts to track the evolution of their loans portfolio and mitigate risk.
- Micro monitoring. At an individual level, we enable them to detect new sources of income (employment, government benefits, etc.) and new loans, based on deposit information — which is much faster than traditional credit reporting.
- Macro monitoring. Some of our clients aggregate the insights we provide to track trends across their whole portfolio, and intervene as necessary.
Planning for success in the “new normal”
A large number of businesses are flying blind in the current environment. Unfortunately, not all of them will be able to learn from this experience.
Building a database of your customers’ transactional data will enable you to look back over this period of uncertainty and generate powerful insights — such as who are your best and worst customers, and indicators they have in common.
These are the kind of insights that fintechs routinely use to generate more value for their customers through personalized experiences. They will help your business thrive in the post-COVID economy.
