Alternative lending market: data is key
• Technology-led innovation will have a far-reaching impact within the sector by reshaping day-to-day processes, writes Pedro van Gaalen
Digital technologies such as artificial intelligence (AI), machine learning, robotic process automation, data analytics and blockchain are transforming the global credit management industry.
As adoption accelerates, technology-led innovation will have a far-reaching impact within the sector by reshaping day-to-day processes, offloading onerous compliance and administrative tasks from staff and creating new opportunities to engage with customers and attract and retain new business.
In SA, pockets of fintech innovation have emerged within the broader financial services market, where the alternative-lending sector is a leading developer of datadriven solutions.
“In global terms, SA is fairly advanced in using data in credit risk management,” says Thomas Maydon, Head of Credit and Analytics at Principa Decisions.
“Organisations are legally obliged to use data to make prudent credit decisions when determining indebtedness and affordability. The ability to effectively identify consumers through the ID number system has allowed financial services providers to pool external data from credit bureaus with other internal sources to assess their credit risk.”
A report on the impact of the fourth industrial revolution on the South African financial services market by the Centre of Excellence in Financial Services also highlights how data analytics has helped to create a thriving alternative lending sector within the local credit market.
While credit bureau information has traditionally formed the foundation for credit scoring, innovative service providers now use alternative scoring methods that combine established data sets with new and unconventional data sources to assess risk and creditworthiness.
“More recently, other aspects of customer financial behaviour beyond credit performance have been incorporated into scorecards to ascertain factors such as their propensity to pay and establish credit limits and interest rates. All of these factors, including internal customer data analytics, are built into automated algorithms, which help to determine the credit offered to the customer,” explains Alfred Ramosedi, CEO of Bayport Financial Services.
Importantly, this alternative credit risk assessment approach creates opportunities to provide lending outside the traditional banking system. This caters to market segments such as SMEs and consumers without formal credit histories or traditional records of income, which have historically been excluded from credit markets based on traditional assessments.
Transaction Capital Business Solutions aggregates credit bureau information and information available on the web to interrogate and understand the businesses it lends to. CEO Darren Abrahams says this, coupled with the firm’s analysis of the applicant’s financial position, enables prudent decision making.
“We have maintained loss rates at around 1% and recently introduced a risk-scoring model into our business to positively impact default rates.”
And digital technology also assists lenders to improve collections and ensure regulatory compliance.
Says Ramosedi: “We use digital technology to improve our communication with customers and have created self-service capabilities via a mobile app and website that allow customers to pay their instalments, access their statements, apply for new loans and view their credit health report at no cost.”
Maydon adds that more can be done within collection call centres to leverage data to improve outcomes.
“Building predictive and prescriptive analytics solutions helps providers extract insights from the mountains of historical and telemetry data they’re sitting on to determine the best action, such as the best time to call a customer.”
To leverage similar capabilities, Transaction Capital Business Solutions develops and tailors bespoke systems to the company’s interactions with clients and debtors.
“The key to successful collections is maintaining strong relationships with the appropriate party, and having easily accessible information. There are no off-the-shelf IT platforms that facilitate the complexities of our business model, which is why we develop our platforms based on the feedback we receive from stakeholders,” says Abrahams.
There is also significant innovation happening within the contact centre environment to transform customer engagements. For instance, Maydon reveals that call centres are increasingly augmenting AI into the collections and sales and marketing functions to empower agents.
“These solutions deliver insights to the agent as they speak to customers, which can inform their approach, expedite issue resolution times to enhance customer experience, or assist with cross-selling and upselling financial products such as insurance or gap cover.”
And the next development emerging in the digital engagement frontier includes virtual assistants and chatbots that enable self-service capabilities. “While consumers, particularly millennials, are more open to using this form of engagement, these solutions are only as good as the data you feed them. Lenders require a good technology platform and data analytics tools to feed these AI-enabled chatbots the information they need to meet consumer expectations around engagement and increase the likelihood that they will yield the desired outcome,” says Maydon.