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FICO Innovation in Lending Hot Topics Q&A with Tim VanTassel

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Tim VanTassel, Vice President and General Manager of FICO’s Credit Risk practice, weighs in on the subject of how marketplace lending is changing the credit landscape, and what that means for both new marketplace lenders and traditional credit-grantors.

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FICO Innovation in Lending Hot Topics Q&A with Tim VanTassel

  1. 1. © 2016 Fair Isaac Corporation. All rights reserved. 1 EXECUTIVE BRIEF Tim VanTassel Vice President and General Manager of FICO’s Credit Risk practice spanning global Originations, Customer Management, Collections and Recovery, Applied Optimization, and Customer Contact Services offerings. Credit markets have seen many changes in recent years, including tremendous innovation, the rise of marketplace lenders around the globe and new credit products from major technology players such as Amazon. That innovation is driving existing lenders to rethink their infrastructure and processes to become more nimble while regulators begin focusing on the new entrants (e.g., The US Treasury Department recently issued a whitepaper on potential disparate impact and fair lending for marketplace lenders). These changes require traditional firms to be agile and adapt quickly to new innovation, new players and new regulation, all the while improving the customer experience. Tim VanTassel, Vice President and General Manager of FICO’s Credit Risk practice, weighs in on the subject of how marketplace lending is changing the credit landscape, and what that means for both new marketplace lenders and traditional credit-grantors. Q. Around the world there has been tremendous growth in marketplace lending (or peer-to-peer lending). What are these companies doing differently that more traditional credit-grantors should be aware of right now? Marketplace lenders are generally serving populations that have had a difficult time getting credit from traditional credit markets, but are also meeting the needs of digital-savvy customers. These companies offer flexible payment structures and
  2. 2. EXECUTIVE BRIEF Adapting to Innovations in Marketplace Lending Hot Topics Q&A © 2016 Fair Isaac Corporation. All rights reserved. 2 quick decision times for customers without the need for them to visit a bank and fill out lengthy applications. The combination of quick and efficient practices is winning customers even if the product isn’t the cheapest option on the market. Part of the speed in the customer experience is due to the fact that marketplace lenders have been relatively free to operate outside of heavy regulation. That said, there is much traditional lenders can learn from these new players. Q. You just mentioned that marketplace or P2P lenders have had to deal with limited regulation. Do you expect that to change? We can safely say regulatory enforcement is in the future for marketplace lenders. In the UK, the FCA is looking at revising the initial rules established in 2014. In China the P2P market has cooled significantly as regulators have stepped in. In the US, the US Treasury Department recently issued a whitepaper on fair practices for marketplace lenders. It highlights that marketplace lenders are creating innovative ways of originating customers that offer more people access to credit. However, they raise questions on whether lenders are making consistent decisions and being transparent about how they are issuing credit. These companies aren’t receiving the same scrutiny by regulators that banks currently do, even though they should adhere to the same laws. This gap in oversight means those firms aren’t held to the same standards of fairness on a regular basis. Several of these lenders have turned to FICO for assistance in navigating the new regulatory waters. One example is in the UK, where we helped one alternative lender revamp its entire orignination process to address affordability regulation. Q. Why do these regulatory issues matter to all banks/lenders? Marketplace lenders have taken advantage of technology and looser regulation to raise customer expectations of what a lending experience should be like: convenient, simple and fast. Lenders of all types are taking notice and looking to implement similar new process innovation. This change isn’t just a nice front-end mobile app or website, but rather it drills down into the fundamental models and analytics behind each lending decision. To make faster and more accurate decisions that balance growth and risk, firms need to build “self-learning” systems that can quickly simulate changes and, if positive, implement them quickly. At the same time, those systems need to be transparent with a clear audit trail for both internal and external compliance. This control is imperative in today’s regulatory environment. What should be kept in mind is that more regulation doesn’t just mean increased costs and more complexity. More oversight actually benefits lenders in the long run in a few ways. It promotes creation of robust product 1 US Department of Treasury. 2016. “Opportunities and Challenges in Online Marketplace Lending.” Whitepaper. terms that will withstand poorer economic environments, increasing the likelihood that a borrower will repay if they face financial difficulties. It also means greater transparency in lending decisions that could lead to better outcomes for borrowers and increased customer experience ratings. Lastly, more oversight would also mean that security threats and fraud would be mitigated if additional steps are taken to protect customer data gathered from alternative sources. Q. How can lenders assess their current loan originations system, and what are FICO’s recommendations for best practices in choosing an origination solution? Both traditional and marketplace lenders should step back and look at their origination systems from a few different angles. First, am I able to deliver a great customer experience? Can I automate decisions and reduce overall decision time to a matter of minutes? Can customers interact with me via multiple channels of their choosing, and are those different channels connected? Second, can I easily address current regulation, and how quickly could I adapt my systems to new regulation that may be in the rules comment state? Third, how quickly can I adapt to changes in the larger macro-economic environment? Do I have the agility to tighten credit standards on a dime if I see deterioration in the economy? FICO offers a host of consulting engagements for firms to assess their current state of originations.
  3. 3. FICO is a registered trademarks of Fair Isaac Corporation in the United States and in other countries. Other product and company names herein may be trademarks of their respective owners. © 2016 Fair Isaac Corporation. All rights reserved. 4291EX_EN 9/16 PDF NORTH AMERICA +1 888 342 6336 info@fico.com FOR MORE INFORMATION www.fico.com www.fico.com/blogs LATIN AMERICA & CARIBBEAN +55 11 5189 8267 LAC_info@fico.com EUROPE, MIDDLE EAST & AFRICA +44 (0) 207 940 8718 emeainfo@fico.com ASIA PACIFIC +65 6422 7700 infoasia@fico.com EXECUTIVE BRIEF Adapting to Innovations in Marketplace Lending Hot Topics Q&A Q. What new technologies or innovations is FICO seeing as firms look to create better customer experiences? There are a few things that we are seeing. While the use of alternative data sources in credit decisions isn’t that new, we see some really unique usage of shipping and online seller ratings for lending to small businesses. On the consumer side, FICO is always looking to help those that may not have access to credit to gain access. The new FICO® Score XD leverages payment history from utilities and telecom providers to help expand the market for credit. Finally, we are seeing the mobile-first strategy with many firms, both traditional and newer lenders. This extends not just to the initial application, but intelligent two-way communications via email, SMS and mobile app notifications. We are working with a major US regional bank to implement FICO® Customer Communication Services for originations, which will enable this two-way communication via multiple different channels. Q. What are FICO customers’ top goals and issues with staying agile in originations? Customers come to FICO with business goals of improving profits, gaining efficiency and improving customer experience while keeping up with the demands of a rapidly evolving market. The most common challenges are finding technology solutions that meet these goals while staying compliant and without heavy involvement of IT. These solutions facilitate rapid adaptation and adherence to the ever-changing regulatory environment. The solution has to be business user friendly and reliable. Q. What types of results is FICO seeing from its origination solutions customers? Customers notice that they are utilizing internal data better and accessing more external data sources to constantly challenge and change origination decision parameters as the market changes. This incremental data allows the customers to make a more informed decision with the objective of correctly assessing risk and pricing it accordingly. Customers have the ability to utilize champion/challenger methodology and implement changes with little or no IT involvement in order to improve decision strategies. We’ve seen faster processing times (from days/weeks to hours/minutes), higher acceptance rates and fewer delinquencies as a result of the implementation of the origination solution and subsequent decision strategies. As a trusted brand in the financial space, FICO provides regulatory and security knowledge so you always have an auditable trail for regulators and protected customer information. Q. How can I learn more about FICO origination solutions? You can learn more on our origination solutions website.

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