Dec 30, 2016 Sean Albert
Peer-to-peer lending, automated investing and new forms of retail banking defined Fintech 1.0. The movement expanded consumer choice, but it did not dismantle and rebuild the financial services industry. However, that's just what Fintech 2.0 may do.
According to Santander InnoVentures, Fintech 2.0 promises to reshape the infrastructure on which financial services operate by extending data usage and establishing fluid processes devoid of hitches. With respect to information, how will alternative credit data fit into Fintech 2.0?
Understanding Fintech 2.0
Data management, real-time analysis and system interoperability lies in the center of Fintech 2.0. Santander InnoVentures envisioned scenarios in which financial institutions (FIs) continuously gathered data from lenders' smart devices to continuously identify opportunities to offer services relevant to borrowers' needs.
Traditional methods of obtaining trade financing are notoriously slow. First, the FI has to pre-screen the business obtaining a letter of credit. Once the company receives the services (or goods) it purchased, the FI must conduct a manual assessment of those services and verify their quality - usually through a paper-based process.
The Internet of Things (IoT) would turn traditional trade financing on its head. Smart devices and software would capture buyer-seller transaction data and product condition information in real-time, enabling them to increase verification and automatically fill small contracts.
The aforementioned scenario is just one of many examples of how Fintech 2.0 will transform the financial services infrastructure. Here's how alternative credit data will fit into the movement.
Real-time comprehensive financial profiles
Obtaining a loan is an arduous process for many consumers, especially for those who lack credit histories lenders can reference. The Consumer Financial Protection Bureau found that 26 million Americans are "credit invisible" - meaning they have no credit data lenders can use to assess their creditworthiness. Even more consumers have either thin-file credit reports or have credit data, but not enough to warrant a score.
Alternative credit data fills the knowledge gap traditional credit reports present to FIs. Instead of referencing conventional credit scores, lenders could pull up consumers' utility, rent and subscription payment reports to determine the likelihood of a person being able to pay back loans. It's important to emphasize that alternative credit solutions must deliver the following features:
- Integration with in-house systems through application programming interfaces.
- Easy sign-up and enrollment for consumers.
- Real-time, continuous data collection.
- Transparent terms and conditions on the borrower-side.
- Strong information security features.
The latter two points deserve further expansion. Some services that gather, process and analyze alternative credit data connect directly to consumers' accounts with utilities, telecom providers, banks and other institutions. This relationship requires an incredible amount of trust, and alternative credit providers must demonstrate their ability to protect individuals' information. Leaders in the alternative credit space continuously test their security protocols, identifying any opportunities to strengthen defenses.
Given that alternative credit data is so ubiquitous and leading services deliver reports online, such information could change the way lenders assess consumers' creditworthiness. Traditional credit reports will still be a part of analysis, but FIs will reinforce this context with more comprehensive data.