‘Getting the model right’: How Regional Finance balances customer-centricity and fraud prevention in digital lending

As lenders become increasingly digital, they need to continuously manage the tradeoff between making really smooth experiences for their customers with becoming targets for fraud. 

Plus, marketing funnels aren’t monolithic – helping prospects move from kicking the tires to applying for a loan needs to be balanced with making sure lenders are attracting the right, profitable people. It doesn’t help anyone if a marketing funnel becomes overly optimized for an unprofitable customer. 

There’s a new class of technologies  lenders use to more efficiently onboard new, profitable customers and make sure they are who they say they are. That’s helping lenders like Regional Finance, a $1.5 billion consumer lender, stay focused on its business.

On this episode of the Tearsheet podcast, I’m joined by Chris Martin, Vice President, Head of Product Management, at Regional Finance. 

Also joining us is Matt Gomes, GM of consumer lending and banking at Argyle, a leading provider of income and employment data that does deep work in financial services.

Tearsheet has partnered with Argyle to create a four part podcast series (Part 1) that explores how different parts of the financial industry are using modern technology and access to new forms of data to power their businesses today and into the future.

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The following excerpts were edited for clarity.

Matt Gomes, GM Personal Lending and Banking, Argyle: Argyle is the leading consumer permissioned income and employment data platform, which effectively means that we allow us consumers to share their income and employment data with financial institutions throughout the credit spectrum and across a variety of use cases, kind of inverting the traditional way that the, you know, folks would verify income and employment by buying and selling consumer data behind the scenes. I’ve been with the company for for a little over a year at this point, and I’m actually a former Argyle customer. So I spent the prior five and a half years of my career at opportunity financial, worked with Argyle to launch a paycheck link loan program while there. And before my time at OppFi, I spent a couple of years at Avant, so about seven and a half, eight years of experience total in the US consumer lending space.

Chris Martin, Vice President, Head of Product Management, Regional Finance: Regional is a $1.5 billion consumer finance company. We offer personal loans through branch and digital channels. We currently operate in about 20 states, and are growing and expanding nationally. I have a pretty long history in fintech actually, before that name even became popular. I spent 15 plus years at Capital One. And my first role there, I was leading account management on the initial foray into booking loans on the internet. So it’s been a long time. And then over the course of my career, I’ve led digital transformation efforts typically at the intersection of technology, operations, and risk functions. I spent about two to three years in the startup world after leaving Capital One. I also spent some time in consulting before moving here to Regional.

Lenders’ challenges with digital

Chris Martin, Vice President, Head of Product Management, Regional Finance: It seems pretty straightforward on the surface, get leads, run your underwriting models, make loans but it definitely has challenges. One of the startups I worked with was challenged to get a mix of leads that had positive marketing economics — we were actually spending more money on getting getting the business than then we were making on the back end. I think that’s typical.

At Regional, we’re really focused on the risk side. So our lead flow is good. But the economics of the actual customers coming in, we still are working to tune our underwriting goals and really make sure that we’ve got the right customer that can be profitable on the back end. The current focus for the team is on getting ROI.

Fintech lenders and getting the credit model right

Matt Gomes, GM Personal Lending and Banking, Argyle: On the fintech side, both consumer lenders that I worked for were entirely digital — Avant and OppFi built their businesses entirely online. I agree with what Chris was saying: one of the real challenges is getting the credit model right and the credit performance right for folks that you don’t interact with at all in person. I think inherently, really regardless of where you are in the credit spectrum, you’re looking at a higher risk of fraud when you’d don’t interact with a human being.

And there’s a lot of different ways that that fraud can manifest itself. I think one of the more common ones is what I would call hard first party fraud — either you’re submitting fraudulent identification documents or fraudulent bank statements, income, proof of income, something like that. And those are really expensive loans to book. Even if it’s 1% or 2% of your issuance, chances are they’re not making any payments on those loans. So, it ends up having a really outsized impact on your overall loss rate. I think fundamentally, especially early on, that’s a much harder challenge to solve for if you don’t have any physical interaction with a consumer.

I think the industry has come a long way. Probably first on the scene were the banking aggregators, the Plaids and Yodlees of the world. That technology has been around for 10 to 15 years and I think it was the first tool in the tool belt to reduce that risk. And obviously, you’ve got folks like Argyle who are going to get that data directly from the source, specific to income and employment — another tool to talk about to fight that hard first party fraud.

Advantages to digital lending

Matt Gomes, GM Personal Lending and Banking, Argyle: On the flip side, I think there are some real advantages to being digital. First, as an organization — it’s very expensive to operate branches. It’s much less capital intensive to just have a centralized call center and a couple of offices and handle everything online versus having hundreds or thousands of leases, depending on the size of the company, to operate a national footprint. And I do think that, early on, [it makes sense] to invest a lot of the savings into getting the credit model right. And then from there, hopefully, you can turn that into a competitive advantage.

Traditional FIs and identity verification

Chris Martin, Vice President, Head of Product Management, Regional Finance: Historically, identity verification has been a highly manual and labor intensive process. Typically, associates request information from customers that’s then sent, hopefully not by email, but you still see that. And there’s a bunch of back and forth. As the customer submits information, the associate goes through the reviews of some mix of driver’s license, pay stubs, maybe a passport, utility bills — all that information is pulled together and collected.

There’s a lot of opportunity for fraud in that space. And honestly, it wasn’t that long ago, you might actually have had to wait for a postcard in the mail to validate your address. So companies have tried a number of different things with the technologies that we’re seeing with Argyle and others like it, it has the opportunity to really streamline that process. There are a lot of developments in that area.

Challenges for risk management

Chris Martin, Vice President, Head of Product Management, Regional Finance: We’re really heavily focused right now on risk management in order to scale our digital originations. We were having success in some credit segments, and we’re still focused on how you get the right mix of underwriting tools, some of the verification tools, potentially some onboarding experiences, that may look a little bit different.

It’s interesting, because even with the same customer, if we’re booking them online or if they’re booking a remote branch-assisted loan or in branch, you see pretty different performance for what you would think is the same customer across those channels. And the trick is to get that mix right without introducing so much friction that you wind up actually introducing adverse selection. Some of your best customers are actually chased off by the fact that the process itself is so complicated, and then you’re left with the customers that you might not want. So we’re experimenting with companies like Argyle in this space right now. We’re seeing some successes and still working to figure out the right mix.

Adverse selection in lending

Matt Gomes, GM Personal Lending and Banking, Argyle: I think it’s a real concern, frankly, throughout the credit spectrum. Logically, I think a lot of folks assume if you’re operating in this kind of prime/super prime space, risk of either adverse selection or fraud goes down because underwriting someone with an 800 FICO is less risky inherently than underwriting someone with a 550. And that’s true on a per-consumer basis, but I think one of the challenges is that with prime/super prime lenders like LendingClub, SoFi, and credit unions, the challenge that they face is that the average loan size, the average ticket size of what they’re underwriting is much larger than say what an OppFi would underwrite or what I believe Regional underwrites from looking at some of your earnings transcripts.

And so the challenge we have there is that it takes only a couple of bad loans to have a really material impact. And if you introduce too much friction, then high performing 800 FICO folks are just going to abandon your process and go to the next process. Online properties like Credit Karma or Lending Tree have made that easier and easier to do over time. So getting that mix right is definitely a challenge. I would say it’s the number one problem that a lot of our clients are solving in the personal loan space — how to introduce the right verification step to the right people at the right time, and do it in as frictionless a way as possible.

Argyle’s work to overcome hurdles

Matt Gomes, GM Personal Lending and Banking, Argyle: Like all conversion funnels, you’d like to believe that they’re really simple. Put X number of people and Y number of people can come out and be verified. We’re thinking about solving for this in a handful of ways. One of our big bets over the last 12 to 18 months has been on extensively mapping companies to SSO providers. One of the common questions we get is ‘great, love that you cover the majority of the US workforce, but how many people actually know their credentials? And the answer used to be, ‘well, a lot more than you think’ because 55% of people are actually shift based and they’re in there all the time. And another 20% are working gigs and we have great coverage there.

But now we have another answer that we can add to that, which is, well, even if you don’t know them, they do, however, know their Google credentials, which is the SSO provider we use to access everything, every day.

The other thing that we focused really heavily on is just data completeness and data accuracy. This is something that we worked a lot with Regional’s credit and risk teams to get their feedback. It’s great if someone connects to their payroll platform, but it’s not super helpful for clients if we don’t return useful data to them. So things like if ‘hire date’ is not actually listed in the platform, we can go back through all the pay stubs and figure out when they were hired, then we can calculate what the hire date was — things like that, so that we’re always returning the complete dataset that’s ultimately needed.

I do think that’s kind of a unique investment that we’ve made. Compare and contrast that against going back to banking aggregators that have been around a bit longer. Lenders need to do a lot more with that data to get to the same level of comfort with someone’s income level, if you only get, say, 30 days of transaction history — that’s not enough to say, hey, this person’s consistently making what they claim to make. So you need a longer history there, and just, frankly, a certain amount of cleanliness before you can run your own calculations.

Where things are working relatively well

Chris Martin, Vice President, Head of Product Management, Regional Finance: Where I would like to see the industry headed and where it actually is headed might be two different things. I think companies like Argyle, Plaid, and others that take customer-credentialed information and make it available to financial institutions to underwrite, I see those companies who are building out their products suite, reducing friction making it sort of easier and easier for customers to use my work sign in to have all of my data be available to my lender. I think that trend will continue, and companies will continue to bring those products together and make it kind of a one stop shop.

Pushing more power, transparency to the consumer

Where I would like to see it head would be more of a customer focus, and from a standpoint of the revenue and business model, have it depend more on just getting it right for the customer. I think the data aggregators are focused on solving for their client’s needs, which are the lenders, and you see customers to a certain extent suffering as a result of that. If you’ve ever tried to work with a credit bureau to get information off your bureau, or if, say, Argyle has an incorrect payment calculation in its software that leads me to get declined when I know I’ve got enough money for the loan, it’s going to be really, really tricky for customers to be able to have a means to address that, or an escalation path out.

The data is complex, and it’s going to be opaque. I think the customers are potentially going to suffer as a result of that. I’d really like to get a company to spearhead more of a customer advocacy position and give the customers the choice: Would I rather go to a company that maybe is more opaque, or maybe I can go to a company that has my best interests at heart? And I want you to use my company to go gather all this information.

Matt Gomes, GM Personal Lending and Banking, Argyle: I largely agree with Chris. I think the beauty of a platform like Argyle is that it is customer permissioned — it’s not data being bought and sold behind closed doors. People are aware of what’s happening, they know which institution their data is being shared with, and they can choose to no longer share that data with that institution. I’d love to be five years into the future and have 100 million plus people that have decided to credential in and make their data available via Argyle, and also have that data be available to each consumer.

I mentioned Credit Karma and Lending Tree — I think one of the really powerful things that both of those platforms has done is really improve a lot of consumers’ lives, making credit reporting available on a streaming basis, so it’s easier to find errors. It’s not necessarily easier to resolve those errors, to Chris’s point. It’s never been a fun experience for me. But at least it’s no longer as opaque as it was, say, 10 years ago. Platforms like Argyle are the next step in that direction, ideally being able to give every consumer a complete picture of what a lender might see when making a credit decision is ultimately the future that I’d love for us to get to. So yeah, I would say largely agree with you, Chris.