Marketplace Lenders Leapfrog Lumbering Dinosaur Banks in Big Data Usage

13 Jan

 14/12/15

While banks excel at writing in-depth research papers about the necessity of institutional investors better leveraging their disparate databases, consensus holds they have not embraced the new science of data analytics to as great an extent as the marketplace lenders.

An article on Finextra.com by Jon May, who writes for KYC.com (Know Your Client), a new Markit and Genpact-sponsored venture to universalise identifiers for legal, tax and margin essentials pre-trade, explains how banks are hampered in their ability to process new credit applications by the seemingly endless checklist of their due diligence process:

“Processes that lead to being compliant are complex, inefficient and fragmented. Data is often sitting within silos across different parts of an organisation. Regulatory, tax and margin changes also mean that banks are obliged to ask customers more questions they weren’t asking before…. there is no standardisation.”

(http://www.finextra.com/blogs/fullblog.aspx?blogid=11634)

Hire Someone Else To ‘Know Your Customer’

When sourcing institutional buyers for a debt issue, the market research techniques that credit funds use, particularly for private debt, are heavily reliant on inter-personal connections. The infamous ‘black contact book’ is favoured over a more scientific data-based approach.

Dave Hunter, a partner with investment sales and marketing consultants First Avenue Partners, which uses social media analysis metrics on industry community forums like Mallow Street, admits that “What we do is still not really enough – and we’re told we’re above market.”

Some believe there is too great a reliance on existing relationships among placement agents. They are essentially, says one industry insider, “hired because they are people who know people, often former brokers.” Coming from this background, he claims, they are more comfortable in the role of ‘salesman’ than ‘data cruncher’.

Although the important firms have proprietary databases and have a policy of profiling contacts to enable better targeting, in many cases the systems are “fragmented and not properly integrated, and there is insufficient training in their usage. Either that, or a reluctance to fully embrace it.”

Gaining Advantage with Strategic Alliances

In contrast, marketplace lenders such as Credibility Capital have formed strategic partnerships with global technology companies and database providers. Credibility Capital has FIS Global source loan originators, a company self-described as “the world’s largest global provider dedicated to banking and payments technologies, with over 39,000 employees serving more than 14,000 institutions in over 110 countries.”

The lender is also partnering with UK-based credit information provider Dun & Bradstreet, which gives an additional layer of information beyond that provided by Experian; to include details on major shareholders in the company, any relevant sanctions, persons associated with it (to identify conflicts of interest), as well as the consumer credit rating of the company directors and management.

Previous bankruptcies and county court judgements are included as a matter of course. The D&B credit database is marketed as a source of comprehensive company research, on anything which may impact a borrower’s credit, or ability to repay debt in the future. Whereas a company like Experian will focus only on their credit record.

Funding Circle provides another illustrative example of the level of analysis many marketplace lenders put into processing credit applications. It claims to take over 20000 factors into account when assigning a risk band, and uses industry standard Experian as well as a variety of other sources.

It will analyse the workings of the business, incorporating factors like commercial invoice payment performance, and profit and loss account over the course of the business’s life. Thus it assesses its durability, while simultaneously factoring for macro trends within that industry; and probability of capturing market share within that region, to assess its future prospects. It will also look at how the loan will be used to advance the business.

Because these are small business loans, the company director has a disproportionate amount of power over whether it is profligate or thrifty. This is why the director’s personal credit, consumer and commercial record is scrutinised so intensely. Banks focus on a client’s due diligence record because their primary concern is violating AML rules; or complying to strict margin requirements on derivative trades.

If banks have any concern that the borrower might default on a loan, they will likely deny the applicant. It seems the marketplace lender’s approach is to use the data to actually get to know their clients, and customers, a little better.

 

To illustrate the importance of having up-to-the-minute systems – or of hiring a specialised data provider – we leave you with some telling stats from both D&B’s own data, and the UK’s Sales & Marketing Institute:

  • Up to 96% of email addresses and contact data within customer files and CRMs are inaccurate.
  • CRM degradation is approaching two percent per month
  • Within a 30-minute period the following changes occur:
  • 120 business addresses
  • 75 business telephone numbers
  • 15 company names
  • 30 new businesses formed
  • 10 businesses close
  • 20 CEOs to leave their jobs
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