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False Economies in lending

False Economies in lending

 

 

Following my recent article in late 2017 “Challenges and opportunities for 2018http://www.lendingmetrics.com/Blog/archive/challenges-and-opportunities-for-2018/ I wanted to follow up with some practical suggestions to address the issues I raised.

These can be summed up in 3 words:

  1. Overcomplicating
  2. Overcommitting
  3. False economies

Just to refresh your memory on what I briefly mentioned on these topics last time around, here are a few a snippets;

  • Overcomplicating! I am usually involved with businesses at a time when change Is happening (or in the case of a new start-up, when ambitions are being formulated) All too often I see scenarios where the sheer scale of the project, (whether it be the simultaneous launch of multiple products or multiple decision engines and complex scores with multiple CRAs) ends up bogging down progress. Change should be gradual, manageable and measured. Too much change at once makes it difficult to achieve and even more difficult for the business to identify which aspects of the change delivered the variations in outcomes.
  • Overcommitting! Time and time again I have seen businesses placing themselves under tremendous pressure by making commitments based upon target aspirations. They sign huge volume commitments with credit reference agencies, they “staff-up” and they sign hideously expensive service contracts for things like software platforms or professional services.
  • False economies! With change comes risk. As every experienced credit provider will attest, it’s a risky business. Regulations continue to evolve, fraudsters continue to innovate and the macroeconomic picture remains uncertain. Its therefore essential to invest the right amount of time and money in the right risk-mitigation measures. Take time to research your target market, use the right anti-fraud tools and get professional regulatory and credit risk advice.”

 

Suggested solutions

So taking the first point. When launching a new lender or indeed expanding an established lender into a new market, there are likely to be many new moving parts. There will be a new risk model, a new CRA (or at the very least new CRA products being consumed from existing CRA relationships) new customer demographics, new payment terms new credit decisioning software, new loan products, etc, etc, etc. So why add to this complexity by overcomplicating the credit decisioning process with multiple theoretical underwriting strategies. Unless your business has extremely deep pockets and has therefore been able to carry out extensive pre-launch retro analysis of the data to be consumed and its affect upon the credit policy (which can be very costly), it’s fair to say that the first 6 to 12 months will be the steepest learning curve. I recommend keeping the credit policy as simple as possible at launch, just enough to meet fundamental requirements of mitigating fraud, confirming ID and verifying creditworthiness and affordability. By all means you can consume other services such as scores or matrices and store them for later analysis, but the bottom line is that you need to lend in order to see results upon which you can act, to improve the decisioning process.

The second point “overcommitting” is such a critical issue. Remember, when it comes to service providers such as Credit Reference Agencies, Credit Decision Software suppliers, Loan Management Software suppliers and various marketing service providers, YOU ARE THE CUSTOMER!

You may well have ambitious expectations for growth in the business and its very easy to allow these expectations to drive the level at which the business decides to commit to contracts for services. However, you have nothing to prove and its entirely reasonable to expect the service providers to view the relationship as a partnership whereby, when you grow they grow. You may have to pay a slightly higher unit cost for some things and that’s entirely reasonable. But compare the cost of paying an extra 10% or 15% per unit for something that only needs £5,000 per month spent on it (because initial growth was slower than expected), with the sinking feeling that you got the very best unit price but had to commit to say £12,000 per month to secure the discount. You’re now in a position whereby you are literally throwing money away each month and trying desperately to grow the business just to justify the minimum contract commitments you’ve signed up to.

 

Which brings me to my last point. In this increasingly competitive world it’s imperative that waste is avoided, however it’s also important not to make unwise compromises. Competition inevitably means some degree of price compression, and one of the largest costs in any business is staff. It is for this reason that most lenders I talk with tell, me that they want to scale their business cost effectively and without acquiring a huge increase in headcount. But some then also build an expensive IT team so that they can “build their own platforms”, essentially re-inventing the wheel. There are literally dozens of Loan Management Software suppliers and several Auto Credit Decision Software suppliers out there in the marketplace and it is their sole purpose in life to build and innovate their platforms, something you as a lender cannot and should not seek to compete with. Are you a lender or a technology company? The most successful companies are those who stick to their core strengths and then leverage technology providers to help deliver. Your business IP is in brand, process and distribution, that’s where I think you must focus your efforts.

But that does not mean the choice of software and other services isn’t important, it is critically important and is an essential component. Automated decisioning and processing brings:

  • Underwriting consistency
  • 24/7 operations
  • Dramatically reduced labour costs
  • Better customer experiences and conversion

These are facts and are undisputed and therefore it’s not a question of whether, but which software supplier to use.

So in summary

  1. Don’t overcomplicate things, start simple and add complexity when its value is proven.
  2. Find partners, not just suppliers and commit to only what you know you need and can support.
  3. Invest in the important partnerships and consider the true cost of in-house development.

If you would like to ask me any follow up questions please email me at neilw@lendingmetrics.com

Good luck!

 

 

 

 

 

By Neil Williams: Managing Director and CTO at LendingMetrics