We’ve all heard of Signet Bank - right? 🤔 Umm.. not exactly.
In the 1990’s two pioneers of data modelling realised that Credit Cards were mis priced and that terms could be tailored to borrowers based on predictive modelling of default. Obviously, nobody believed them and the large US banks shunned this crazy talk. Finally, a bank called Signet Bank decided to give them a shot and from there Capital One was born - you have heard of them though?!
Analytics needs data and the correct data is not that easy to collect. The data you need is lending data, not just demographics or social media data.
How do you garner lending data? You need to make some assumptions and give loans to test those assumptions and then refine those assumptions. I once ran such an experiment and it was an abysmal disaster. We recovered ALL our money so we learned nothing. Disaster. Trust me, we would have preferred some defaults - certainly not 100% - but some, just to learn.
Fintech companies are more experiment based and happy to take risks. For regulated banks, risking customer deposits in such fashion can be difficult to explain to regulators and customers later - which unfortunately I have also witnessed in some projects in sub-Saharan Africa.
There are two Fintech projects I love which are developing interesting credit scoring models and analytics.
is a UK fintech which lets people pay rental deposits over time rather than in one large upfront payment. This is an excellent product targeting a niche demographic, which will grow with the provider over time. Similarly, Petal
who have spent the past 5 years analysing user data in the US, including credit, have developed clean credit models for their customers and released these using an API 🚀.
Along the way, Product development has followed Fintech and so has the overall Technology stack i.e. not just distribution, but the entire operating system.
The Technology evolution is extremely important as it is this exact change towards open banking, open data and Banking-as-a-service provided by ClearBank or Plaid (and many others) that facilitates the improved Fintech product development and also ushers in an era of embedded finance.
Financial products can now be built outside of the traditional financial ecosystem, but interact with it to verify users, collect payments or gather data.