The heavy reliance on credit risk to underpin lending decision-making is no longer fit for purpose within our more modern and digital economy.
This may spark disagreement from the traditional banking and finance professional who has honed their craft around a decades old approach towards credit risk management, with the added comfort and security of using financial spreadsheets, personal judgement and accepting the risk and cost of human error.
I understand that every finance provider has their own internal model for managing risk for their organisation.
But this only encourages the traditional silo approach, that has created a lack of consistency within lending across the global SME market. With a current UK SME funding gap of £2.2bn, it is evident that something is not working.
This, in turn, increases the difficulty of servicing the ever-changing needs of UK SMEs and highlights the requirement for innovative new approaches - a clear example of this, is the global impact of COVID-19, government support provided through banks and other services, and unprecedented changes to normal lending processes to ensure the efficient deployment of much needed funds.
I believe that the use of alternative data within banking and financial risk management models is essential, to unlock deeper real-time customer and business intelligence that adds sustainable value.
By combining new intelligence with information from more regular and traditional sources of data, finance providers will unlock new advantages, such as:
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The ability to integrate better compliance practices
Compliance regulations change on a regular basis and it is important for finance providers to be agile enough to update their processes and operational workflows on a continual basis, so they always remain compliant.
Having access to better intelligence to benchmark against compliance measures, can help finance providers improve the pace and accuracy of meeting their compliance objectives.
Coupled with the use of digital technologies, organisations can also create more efficient ways of working such as automating routine tasks within compliance teams that were traditionally done manually.
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The ability to create more informed lending decisions
A judgemental risk appetite may help to justify internal lending confidence, but every business has their own journey.
Growing a business is hard and mistakes will be made. But bad decision-making in the past, does not mean that the customer will not be a good performing business in the future.
A moment in time, is not always a true indicator of growth potential.
If financial lenders choose to integrate alternative data within risk management processes, and combine this with existing insight from existing lending and finance models, they can access a much more holistic view of the environment that the customer operates within (i.e. real-time insight on wider market and sector trends that can may affect the business or unlocking new historical insight on past business performance) and make much more informed lending and business growth decisions.
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The ability to reduce defaults levels and overall bad debt risk
Alternative data and intelligence can help finance providers put in place interventions and support, before actual incidents occur, thereby reducing future risk and costs.
Powerful insight on performance, internal portfolio trends, global economic trends, peer to peer benchmarking are all examples of ways in which an organisation can identify new data patterns, that gives clues to potential lending issues.
But let us not forget.
The financial crisis of 2008-2010 has shown that nothing is ever set in stone, when it comes to the world of finance.
We have seen how additional finance backing from government can support those who we cannot afford to see fail. You may have your own opinion on that, but COVID-19 has repeated this pattern by providing more financial support to lenders, to tackle the impact of COVID-19 on the SME market.
The sad irony of this is that whilst many businesses will grow from this support, it is laying the foundation for future negative impact. The cold reality is that the sheer scale of need was unexpected, and not every business will turn out to have been a good lending decision.
Banks and other responsible lenders will still have to manage the ongoing operational costs of servicing this lending, at scale, for years to come.
However, I truly believe that digital disruption is a benefit and gives finance providers the golden opportunity to manage these impacts and evolve.
They can finally loosen the shackles of the past to unlock new intelligence and meet the diverse needs of the businesses and communities, that we are all here to serve.