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Five Questions on FinTech — John Wirth

TransUnion
Blog Post11/16/2020
Credit Trends and Reporting
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1.) We’re operating in a very different environment than before the pandemic. As consumers’ liquidity sources – stimulus payments, expanded unemployment benefits, forbearance – dry up, what account management or collections strategies should FinTechs consider?

Many personal loan lenders believe that once the money is “out the door,” there’s not much they can do about customer repayment performance. However, lenders can identify consumers who are at risk of delinquency and deploy different tactics to help reduce the risk. When FinTechs actively evaluate customers, they can track balance increases, score declines, Aggregated Excess Payment declines, off-us delinquencies and recent inquiries. Together, these insights give lenders early signs when consumers’ risk may have changed. In advance of a delinquency, FinTechs can work with these customers to modify loan terms and reduce monthly payments via term extension and rate reduction.

Personal loan lenders could encourage — or even incentivize— customers to adopt auto-pay. FinTechs should also establish regular communication with their customers when the loan is opened. There are many benefits to this: it enhances the consumer relationship and gives lenders opportunities to cross-sell and re-loan. And if a consumer begins to exhibit signs of financial changes or distress, lenders can easily contact the customer. The lender communication about any potential or actual delinquencies won’t feel out of the blue for the consumer.

Even if these approaches ultimately lead to delayed or reduced repayment, they result in better financial returns on these loans for lenders when compared to charging-off and selling to a third party.

2.) The CARES Act has led to record numbers of consumers in forbearance. As the forbearance period ends, how can FinTechs evaluate consumers’ likelihood of financial recovery?

As consumers come off forbearance, the first step is to gain full visibility into a consumer’s forbearance status across their wallet. This is critical because FinTechs need insight into a consumer’s performance or behavior with other lenders. A customer may be showing no signs of stress with the on-us relationship, but could be in forbearance with one or several other lenders.

TransUnion’s CreditVision® Acute Relief Suite offers FinTech lenders such additional insight. With these attributes, lenders can better understand how consumers and their accounts were affected — and see this information by different credit products, as well as when accommodation or forbearance statuses were reported and the balances of those accounts.  These insights can protect FinTech lenders, while allowing them to implement new account underwriting strategies.

3.) What treatment approaches should FinTechs consider for consumers coming out of forbearance?

The COVID-19 pandemic is complex. As each lender-to-consumer arrangement may be different, there is no single, simple indicator of who is affected and who is not.  It’s important for lenders to identify which of their customers are in forbearance with them or other lenders. We recommend a multi-step process, designed to help lenders segment their current customer base for targeted treatment given a customer’s likelihood to recover and repay.

Lenders should work with their customers before and as they emerge from financial accommodation to generate better outcomes for consumer and lender alike.  First, lenders should identify which of their customers are in forbearance, both on-us and with other lenders. Once they’ve identified these customers, they should engage them through regular communication to understand their current financial situation and to set expectations for repayment timing.  Next, lenders should evaluate the consumer’s likelihood of financial recovery and their ability to repay, leveraging the power of trended credit data to gain this customer insight. Finally, lenders can then segment their population of customers into appropriate treatment strategies to drive efficient resource allocation and to assist those customers in greatest need.

4.) FinTechs’ competitive advantage is their use of data and analytics. How should lenders rethink their models in the current environment?

Consumer and market conditions remain dynamic as COVID-19 rates shift regionally and states open or close down parts of their economies in response. Many lenders tightened their lending criteria and score cutoffs as an immediate response to the pandemic. Employment and income verification is increasingly important as consumers’ employment statuses change rapidly and certain sectors are affected more by the pandemic and its economic consequences.

To understand what is happening with consumers in today’s dynamic environment, lenders can gain greater insight and clarity through trended credit and alternative data. With traditional credit data, lenders can only see how a consumer’s credit looks at a point in time. For instance, traditional credit data shows a consumer who has 30% utilization of available revolving credit or a consumer with a $5,000 credit card balance. Trended credit data provides enhanced insight into consumers’ financial behavior and trajectory over time. Looking at the same consumers, it may show the consumer with 30% utilization has steadily increased their balances and the consumer with a $5,000 card balance has revolved their balance for 18 months at a high rate. Looking at changes in Aggregate Excess Payment — the difference between minimum payment due and actual payment, summed up across a consumer’s debt wallet — gives lenders additional insight into consumer financial capacity and early signs that a consumer’s situation is improving or worsening.  These insights help lenders understand if a consumer is demonstrating excess capacity or quickly building up debt, a sign they may be beginning to struggle. With a more refined understanding of consumer risk, lenders can refresh their models to address the changing environment.

5.) Since the pandemic, identity fraud has increased 23%.1 How can FinTech lenders reinforce their defenses against fraud as it evolves and shifts?

Almost overnight, the financial services industry saw an accelerated shift from in-person to digital channels. While FinTechs have a leg up since they’ve focused on being digital first, it’s important to understand how fraud is growing and changing.

After the pandemic was declared, identity theft was the top reported fraud type for financial services organizations, according to a TransUnion traffic analysis.[2] With the right fraud solutions in place, FinTechs can verify consumer identities and establish trust, authenticate consumers and prevent fraud without hurting the customer experience during this trying time.

We recommend FinTechs implement identity proofing controls, including verifying consumer-provided personal information, emails, and phone. Devices are a key component to understanding consumer risk in a world of accelerated digital transformation and FinTechs should assess the risk using the context, reputation and behavior of a device to make decisions with greater confidence. These security enhancements can be streamlined into the application process for FinTechs by enabling ID document capture and validation online. It’s imperative for FinTechs to identify risky characteristics or anomalous behaviors in consumer-provided information and verify against a multitude of data sources to uncover suspicious patterns within account openings and authorizations. 

To learn more about how TransUnion is helping FinTechs stabilize their portfolios, prepare for increased collection volumes and protect against digital fraud during COVID-19, please fill out the form below.

 

[1] Protecting Against Shifts in Digital Fraud

[2] Protecting Against Shifts in Digital Fraud

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