A review of what was hot in 2018 and what will happen in 2019.
The end of 2018 and start of 2019 brings with it a sense of major developments in the world of business, with credit risk and finance swept up in this constant change. In today’s blog, we will briefly recap some of the interesting developments in credit, risk and finance for 2018 and cover the important topics, and changes coming in 2019 and beyond that will affect both credit providers and consumers.
Machine Learning & Artificial Intelligence
2018 saw the concepts of machine learning and artificial intelligence really take off and make their way into the lexicon of many areas of business, with credit and risk being no different.
Utilising scoring is the most accurate and best data driven credit risk assessment strategy and many organisations are going down the route of utilising this in their strategies. Many are held back by lack of resource, skill sets and money as the incumbent way of building a scorecard is extremely labour and analytics intensive and is costly. Strides have been made in the use of machine learning and artificial intelligence algorithms that do this work in far less time with similar or better results. Fair Isaac recently undertook a study to quantify the difference between the traditional method and machine learning, the results showed a 2% increase in predictivity and a reduction in hours needed to build from 800 to 40 (Fair Isaacs, 2018). These are fairly significant results and without a doubt we will see significant use of this and similar technology by both bureaux and individual organisations in their credit scoring and rules-based analysis this year.
In 2018, open banking really began hitting its strides with several localities pushing positive regulations in this area to promote innovation and vying to become geographical leaders in this area. As such we have also seen great steps forward and innovation from fintechs in this space, from budgeting and payments apps to aggregators in the SME finance space allowing for quicker financing decisions.
Closer to home, Xero has recently announced they will be creating an open banking API allowing companies to access banking data which will further innovation and accountability (Xero, 2018).
2019 is in or some major changes from open banking with consumers being the sure winners if they are willing to provide consent for the information to be shared with 3rd part innovators. Banks will find that regulation in this area will force them to share data and might incur some significant costs and will make them up their game around products and offerings as the space becomes more competitive from agile fintechs offering nimble solutions.
Alternative data refers to data that is not normally used in the credit decisioning process. This varies from country to country based on their credit reporting data laws and data sharing agreements and a classic example of some innovation here was shown late last year in the United States where credit bureaux are allowing users to share “alternative” data to help improve their credit score. In the US, account payment information reported on credit reports is still largely from financial institutions so the inclusion of this extra information from telecommunications, utility and rent payments should have a large effect on many consumers’ scores by showing good payment behaviours in other areas and improving their scores where they may not have had any payment behaviour before due to not having any accounts with banks, credit card or finance companies.
In New Zealand by comparison, our Comprehensive Credit Reporting regime allows for and has been actively taken up by credit providers from banks to telecommunications and utility companies meaning our bureau data coverage for account information is rich with “alternative” data.
Alternative data also covers a few other concepts other than normalised “credit” information. New fintechs have identified correlative data to the probability of default such as social media behavioural data, ecommerce data and internet browsing data and have incorporated these into non-traditional scorecards to assist credit providers in making decisions both in conjunction with traditional data as well as when customer present lacking traditional credit data.
Further adoption and recognition of alternative data sets will grow in 2019 and will have positive impacts on both consumers and credit providers by allowing them to quantify risk in previously unserved populations.
2018 saw digital customer strategies really take off and whilst improvements have been made across the board, many companies are still a way off. Customer digital strategies are also an ever-evolving concept.
Chat bots became a common and needed digital engagement strategy during 2018, and 2019 will see their use expanded and become a sales channel in their own right. 67% of people expect to see or use messaging apps and chat bots when talking to a business (Chatbots Magazine, 2017) and 35% of consumers want more businesses to adopt chatbots (Ubisend, 2017) showing that the need to include this in your digital strategy is paramount. Recent innovation in this space has seen the onboarding process fully handled by a Messenger chat bot that asks all the relevant questions for data capture and answering questions consumers may have (Cove Insurance, 2019). This offers a great new way to onboard customers to engage and deliver personalised content throughout the customer onboarding journey.
Further adoption, development and innovation in this space can be expected in 2019 meaning organisations will need to ensure they are constantly reviewing their digital strategies, customer experience and engagement programs.
One of the most exciting and enduring hot topics in business currently is blockchain, and more importantly, how it can be used to revolutionise certain industries. Many companies are still trying to wrap their heads around what exactly blockchain is and its potential and one such area that started being explored early was credit.
The key problems highlighted by proponents of blockchain technology in credit revolve around security, lack of transparency and control of data, errors and credit accessibility.
Blockchain’s distributed ledger technology is touted as a good fix for the security issue as the data is distributed with secure cryptographic blocks and not held on any centralised database that is a target for hackers. Data breaches such as the 2017 Equifax hack of 146 million consumer records have highlighted and driven people to question the security of large data holders (Security and Exchange Commission, 2017) promoting the cause of blockchain solutions. Blockchain’s verified transactions and permanent record mean that altering or tampering with the data is almost impossible.
Consumers are also becoming more aware of the concepts of data ownership and consent and this is another area where blockchain has been discussed as a potential solution. Currently, bureaux hold a lot of data on consumers and how and when it is used is not transparent. Consumers are looking for ways to control their own information and how it is used. Blockchain promises to allow consumers to completely control the credit information held on themselves and to share with lenders or employers or landlords on their terms, and a set limits on the time frames it is accessible.
This same accessibility to their own data also means that consumers would be able to fix errors instantly. Currently the process when contacting bureaux can take weeks to fix as the bureaux themselves don’t have much motivation to do it currently.
Lastly, the problem of accessibility and cost of credit is another area where blockchain can potentially have massive consequences. Access to credit is a vital part of helping individuals create opportunity for themselves. The logic is if a consumer is a good credit risk in one country, they should be in another, and with the massive discrepancies between interest rates in different countries, especially in developing economies, access to affordable credit can be unachievable. The idea of how blockchain can help is by creating a borderless financial identity whereby consumers can use this identity to apply for finance in any country and access credit at a lower cost.
The consequences are huge and fundamentally market changing, definitely something to keep an eye on. With all that being said, this is still all only potential. Adoption and working through finer details as well as regulation will need to be addressed.
2019 is shaping up to be another hugely interesting year, follow us on Linkedin and Facebook for updates and insights during the year.