It’s 2023, and things are looking gloomy. Covid remains a challenge for some countries and, to make it more difficult, war is wreaking havoc on supply chains. As the calendar pages turn, the economy seems to be barreling towards a recession that will likely make things more difficult for households and financial institutions alike.
Lending is transforming in these turbulent times, with lenders dialing back credit risk in one of the most anticipated recessions in history, according to Brian Hughes, Chief Risk Officer at Discover.
However, unlike 2008, multiple features of the current economy differentiate the oncoming downturn from the previous one, Hughes noted in a webinar.
First, the cause of current economic headwinds does not stem from the finance sector, but instead it's fuelled by the government’s monetary policy and macroeconomic conditions.
Second, due to the pandemic, many firms were not able to hire according to their needs. This foretells a thin silver lining for the coming year in which, unlike past recessions, firms may continue to hire and the labor market as whole may be able to avoid widespread unemployment.
This recession is expected to impact the financial system differently than the ones in the past. “The credit losses that banks are going to suffer, I think, are going to be driven by expense pressure, rather than revenue pressure,” said Hughes.
Hughes thinks that since the downturn is more of a result of macroeconomic and government policies, the recession may be less of a crash and more of a slump. After 3 years of anxiety, uncertainty and instability, we are counting our blessings, and this is one of them.
Recession aside, credit is changing. New products that aim to bring in underserved communities into the fold as well as innovative credit risk assessment methodologies are becoming part of the zeitgeist. Alternative data is slowly but surely driving this push. Due to its capability to capture consumer segments that were written off by the traditional credit scoring system.
While innovation is welcome, it is also difficult. Alternative data is new, the traditional compliance and regulatory mechanisms that safeguarded the traditional credit system are out of the picture right now. Moreover, alternative data which comprises consumer income and cash flow transactions is consumer permissioned as well as messy.
Sarah Davies, Head of Data Analytics, at Nova Credit points out that this messiness is borne from the newness of using cashflow and transaction data. Traditional credit data has evolved sophisticated supporting infrastructure like the Metro 2 format, that exhaustively details how data is to be recorded, stored and eases sharing within organizations. This essential scaffolding is missing from this “nascent” environment at the moment.
So how do you get around this messiness? According to Hughes the answer is in the basics: test, test and test again. Using models such as champion/challenger methodology can help firms streamline their analytics and gear up for new products like BNPL.
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America’s biggest banks will report another quarter of bumper profits from lending this week, a windfall investors fear will near its peak this year as the US Federal Reserve’s rate rise cycle draws closer to its end.
It seemed like a good idea to get into lending back in 2016. Then three years later, Goldman Sachs made a splash in credit cards by winning the Apple Card from Barclays. With a goal to drive into credit cards for iPhones, Goldman might have been a bit risk tolerant. And now, with an unsteady economy, there are risks, risks, and more risks.
Amazon is expecting to roughly double its loans to sellers in 2023, though its underwriting process could get more stringent as repayment rates are expected to drop.
Instead of its previous goal of reaching as many Americans as possible, the company will now focus on home loans for existing bank and wealth management customers and borrowers in minority communities, CNBC has learned.
One in every three fintechs is focused on lending in India; a much higher proportion than in the global EM landscape. Digital transactions now account for 99% of volume and 96% of value out of the total payments activity in India.
As states continue to impose 36% interest rate caps on loans, some fintechs say these blanket cutoffs do more harm than good. There's a place for small-dollar loans that help people out in a pinch and come with a fee, they say.