In a technologically connected world, credit decisioning is rapidly changing. You can now apply for a loan and get it approved within seconds right on your mobile phone. That’s a big change from conventional banking. Actually, think about a conventional loan application. Once you express an intention to borrow from a conventional bank, there is a pre-screening you are subjected to that includes historical banking relationship with the bank as well as proof of income.
You then fill a lengthy form that requires you to supply a lot of proprietary information (and provide several attachments as well). Once this is done, there is a credit analyst who’s whose work is to assess your ability to repay the loan, mostly based out of physical copies of bank statements that you attach to the application and also cross-checks your records with the credit reference bureaus. The analyst then issues a recommendation as to whether you meet the bank’s risk criteria to qualify for a loan. The recommendation is then passed to the head of credit who prices your application and issues a term sheet, basically stating the terms and conditions on which the loan will be availed.
The application, once approved, then moves to a credit administrator to process the loan and ensure disbursement. At the tail end of the process, there is a lawyer to ensure all the loan covenants are executed. There is also a credit monitor to ensure the loan is performing from the first day and all repayments come through as they fall due. Finally, there is a remedial officer to ensure the debt can be recovered in case you fail to meet repayment obligations.
This is such a tedious and costly process. Worse still, all these costs are loaded into the final credit pricing. Can the process be made leaner and less costly? Yes and the answer lies in open banking.
Broadly speaking, the concept of open banking really entails making systems and data more mobile and interoperable, such that third parties can easily plug and play. For financial institutions, this then enlarges the wallet-size. The question is what if a financial institution can outsource credit scoring to third-party engines through application programming interface (API) integration. This then allows such a financial institution to automate appraisals and credit scoring, reducing the time it takes from weeks to just minutes.
But this calls for the financial institution to standardise its data and systems, ensuring their mobility and interoperability and making them available to third parties. Platforms like Weza.io are already playing in this space. With Weza.io, a lending entity can either validate credit scores. This essentially means that it acts as a secondary reference point. Or Weza.io could provide white-labelling, which comes with a full end to end loan system that includes the app, the back-end loan system that includes the credit scoring engine and the in-built fraud mitigation algorithms, plus the dashboards for performance monitoring.
Fraud has become a big issue especially in the micro-lending space. Today, savvy fraudsters can steal your identity and use the same to register another mobile phone line (or SIM Card). Through that line, which bears your identity, they can commit fraud. They can also use your identity to apply for a mobile loan, for which they have no intention of repaying, leaving your risk profile exposed to adverse listings. The surprising feature of such frauds is that they are end-to-end, meaning there is often a collaborator within the company.
There are however platforms that have put in place robust fraud mitigation mechanisms. For example, Weza.io embeds fraud detection and mitigation algorithms on the lending system to curb identity and data theft. The platform has a fraud mitigation algorithm that checks various data points to assess their authenticity. Second, for internal fraud perpetuated by company employees, lending decisions and eventual disbursement of funds to the clients is automated, which limits human interactions with the process. The future of banking is open infrastructure and Weza.io is taking the lead.