The global health crisis and the corresponding months-long lockdown introduced in almost all countries around the world is an unprecedented situation in modern times.
It is conceivable that information, assumptions, and concepts that were considered 100% reliable and valid prior to the crisis, will be challenged and may have to be retested.
A Black Swan
Digging deeper, we ought to ask how will all of this affects credit scoring in general, considering typically past loan performance data is used to predict future borrowers’ creditworthiness.
What happens when due to a sudden economic shift, past data is less capable or relevant to predict behavior in the “new normal”.
As Nassim Nicholas Taleb would put it, we are clearly witnessing a Black Swan an unplanned large-scale event with global impact.
This cornerstone of his philosophic theory (and thought-provoking book by the same name), stipulates that exactly because of Black Swans, past performance cannot and should not be used as a predictor for future behavior.
However, Black Swans are not necessarily equally negative for everyone.
The same crisis currently affecting the airline and hospitality industry has been driving demand up for e-Commerce, Online Payment Services, and Cloud and Collaboration Platforms, both locally in the Philippines, as well as globally around the world.
The Financial Industry
Undoubtedly, there will be shifts within the financial and fintech industry as well. Companies will not be equally impacted and some will see disproportionately larger growth while others will likely cease to exist.
Global reports on the Fintech industry say that fintech businesses, relying on large unsecured lending loan portfolios will struggle the most, while payment providers, aggregators, e-wallets, and SaaS platforms and service providers will benefit from it.
In the short-term, companies like alternative data scoring sit somewhere in the middle. None of the core operations of the business relies on physical access to end clients or partners and we are 100% cloud-based and remote-ready since day one. This however presents a challenge, when the market players are not equally digitally ready.
In the long run, the economic crisis bears the seed of opportunity for any FinTech business.
A huge part of our efforts in the “new normal” will be to facilitate further the digital transformation on the domestic and regional level, helping corporations and organizations, whose existing brick and mortar, agent, and branch-focused business models are being seriously challenged by the forced quarantine and strict social distancing measure
Digital Payments and the Bigger Picture
Consumer behavior is changing in the “new reality”. While this isn’t a trend directly stemming from any particular data source, it is notable that people all around the world are generally showing greater concern for their health and well-being, combined with reduced transportation options. In turn, it steers them away from activities that previously required physical presence – meetings, events, going to the local bank branch, paying bills in cash, or visiting a remittance center.
Transitioning to online or digital payment channels has therefore been one of the cornerstones of the recovery strategy of countries like the Philippines, with the Bangko Sentral ng Pilipinas (BSP) rolling out a three-year digitalization plan and gradual move to a cashless society. This helps to establish and further enable new ways of processing payments, primarily spearheaded by innovative fintechs.
Increased adoption of digital payments is generally a good trend for society from multiple points of view, but above all, it contributes to the establishment of a new dimension of a “digital identity” and a digital footprint. In turn, it enables pieces of it to feed into the loan underwriting process and drive better credit decisions, while simultaneously increasing the appetite for more information and more new dimensions from one’s digital identity to be unlocked.
Imagine a world where access to credit is based not only on age, gender, income, and past financial history, but also on information (and reputation if you will) from various other sources – number of digital wallet transactions, average order size from a food delivery app, 100% successful delivery rate on online shopping, or the average number of riders taken on a car-hailing app. Gradually unlocking the value captured in each of these data sources and making it available through an open-for-all data marketplace will tremendously empower all members of society and achieve an order of a magnitude higher percentage of financial inclusion.
It may take some time to get there, as every massive struggle, we strongly believe the current global health crisis carries the seed of potential to get us there faster.
While digital lending will be a strong category in the long-term, this category faces difficult short-term prospects as consumers and businesses miss payments or default altogether. Their advanced credit risk algorithms will help to limit losses and potentially allow them to serve consumers and small businesses that traditional banks won’t serve, there is still a concern around the risk these firms will be willing to assume.
Even though a great deal of attention has been given to the impact of COVID-19 on traditional banking institutions, there is also a significant impact being felt in the fintech marketplace.
Unlike traditional banking organizations, the majority of fintech firms have been in existence less than a decade, with few showing operational profitabilities. In most cases, fintech firms have relied on investor funding which is far from guaranteed in the near or intermediate future, especially as revenues have dropped since the pandemic.
A March survey of more than 1,000 tech start-ups (industry-wide) across the globe by Genome found that more than 40% did not have enough capital to survive past June, with about two-thirds of these firms not having enough capital to survive past September.
Besides their age, scalability, and financial condition, the outlook of many fintech organizations will also be driven by their respective product category. This is especially true in the near term when the impact of the pandemic on consumer behavior is expected to be the greatest.
According to Boston Consulting Group (BCG), the negative impact of COVID-19 will be more severe for those fintechs in international payments, unsecured and secured consumer lending, small business lending, and those where risks may be highest. It is believed that those fintech firms focused on B2B banking are less vulnerable as a group.
FinScore is an alternative credit scoring company that offers a powerful credit scoring platform and fraud detection tool based on alternative data, including telco-based data. As the pioneer in lending and scoring of the unbanked in the Philippines and Southeast Asia, they continuously empower banks, financial institutions, and credit bureaus with flexible platforms to help them make insightful and reliable credit decisions.