unsecured credit broker - concept overview

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UNSECURED CREDIT BROKER - NEXT LOGICAL STEP IN UNSECURED CREDIT LENDING

PART 1 – OUTLINING THE PROBLEM

PART 2 – CURRENT PROCESS: UNSECURED CREDIT LENDING

PART 3 – PROPOSED PROCESS: UNSECURED CREDIT LENDING

APPENDICES

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PART 1 – OUTLINING THE PROBLEM, OPPORTUNITIES AND PROPOSED SOLUTION

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1. PROBLEM

Applying for Unsecured Credit has become complicated. In an ever cluttered consumer lending market, how can credit applicants be aware of the best interest rate (or loan amount that best meets their requirements) without the need to:

Apply with multiple lenders? Rely on face-to-face 3rd Party Brokers to deliver the “best deal”?

1.1 OPPORTUNITIES

Introduction of Comprehensive Credit Reporting will, among other things, enable ‘Credit Comparison Sites’ to evolve into ‘Online Credit Brokers’, providing customers a list of credit providers prepared to grant them ‘conditional approval’ following verification of Residence, Income and or Employment.

1.2 PROPOSED SOLUTION

The introduction of 'Comprehensive Reporting' will facilitate the emergence of 'Online Credit Brokers', providing new and customised avenues for credit.

Prosecuting the right policy and process, presence of these ‘Online Credit Brokers’ will democratise the Unsecured Credit lending environment,

enabling consumers to make better informed decisions during the credit application process by allowing them to compare and analyse ‘conditional credit approvals’ submitted by lenders competing for their business.

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PART 2 – CURRENT PROCESS: UNSECURED CREDIT LENDING

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2. CURRENT PROCESS: UNSECURED CREDIT LENDING (HIGH LEVEL PROCESS FLOW)

1B. Credit Applicant enters

details as requested on

Application form (full form

application)

STAGE 2: Single Lender Decision

1C. Credit Applicant

SUBMITS application.

waiting approx. 60 secs

response from Chosen

Lender site.

2A. Credit Applicant will receive the following response on:

Decision – approved or declined. IF ‘approved’, applicant will be made known of

Comparison Rate % - based on Risk Based Pricing

Term - based on Customer Declared

Approved Loan Size - pending Full Verification

STAGE 3: Applicant Response

3A. OPTION

1 3B. OPTION

2

IF Customer is dissatisfied with 'Indicative Approval

Conditions' (eg, 'Comparison Rate’) they'll reapply

elsewhere.

IF Customer is satisfied with 'Indicative Approval

Conditions' THEN they’ll provide further information as

instructed during Stage 4, Verification

They'll continue to do this until they receive the decision (ie approval), or lowest available rate, or one that matches their own 'self-worth'!

STAGE 4: Verification

START

1A. Credit Applicant

SELECTS Preferred Credit

Lender to apply. Usually via

Direct or Online

Comparison Sites etc

STAGE 1: Capture Applicant Data

4A. Lender will manage application as

per their standard policy and process.

END

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PART 3 – PROPOSED PROCESS: UNSECURED CREDIT LENDING

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3. PROPOSED PROCESS: UNSECURED CREDIT LENDING (HIGH LEVEL PROCESS FLOW)

1A. Credit Applicant

applies for Card /

Unsecured Personal

Loan via Online

Broker Panel

1B. Credit Applicant

enters Fields on

Application Form 1C. Credit Applicant

SUBMITS Application

3A. Lender Response 1

(Bank 1)

Comparison Rate%

Loan Amount

Supporting Docs

3B. Lender Response 2

(Bank 2)

Comparison Rate %

Loan Amount

Supporting Docs

STAGE 4:

Lenders Application Web Site

“Select” will route to

application page


application page

1st Fail

STAGE 2: Registered

Credit

Providers

1F. Application records

‘NO Match’ to Bureau

1E Application records

‘Match’ to Bureau Matrix

and Passes Capacity

2A. Application

will be issued to

‘Registered

Credit

Providers’

2B. Applicant will

receive message (

via email or SMS) to

review responses

from lenders

STAGE 3: Applicant

Response

(Select Lender)

3C. Lender Response 3 (Bank

3)

Comparison Rate%

Loan Amount

Supporting Docs


application page

4A. Applicant completes

Application Form, then

submits

END

1G. Application Fails

Capacity

STAGE 5: Manual Selection

5A. Apply directly via

selection of lenders,

reflecting current

Online Comparison

Sites etc

5B. Lender will manage

application as per their

standard policy and

process.

END

4B. Lender will manage

application as per their

standard policy and

process.

2nd Fail

STAGE 1:

Capture

Applicant Data

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3.1 PROCESS FLOW EXPLANATION - 1B

This section represents the Preliminary Baseline Capacity Assessment methodology. This is applied by the ‘Online Credit Broker’. When the Credit Applicant selects their preferred credit lender to fund their Loan request, the selected lender may choose to

a. Incorporate the Preliminary Baseline Capacity Assessment methodology as part of their Credit Policy and Process rules OR b. Apply their Own Proprietary Capacity Assessment methodology based on data input fields provided.

In the end, the chosen Credit Lender is where the actual Capacity Assessment takes place.

Data Input fields include:-

Fields 1 - 6 will enable a match to the Credit Bureau Fields 7 - 8 will support the deployment of a capacity assessment, relying on ‘Henderson Poverty Index’ as minimum baseline. Fields 9 - 10 will enable communication with Applicant. Field 11 - 12 will serve to customised loan response Field 13 - 17 will enable full capacity assessment to take place.

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3.2 PROCESS FLOW EXPLANATION - 1D to 1G

Scenario # Scenario Actions

1

IF Applicant

PASSES CAPACITY and is MATCHED against CREDIT BUREAU

2 concurrent actions will ensue

Applicant is notified of Credit Bureau Score with 5-7 seconds Application will be issued to ‘Registered Credit Providers’

2

IF Applicant

NOT MATCHED against CREDIT BUREAU

The applicant will be prompted to re-confirm data inputs 1-6, mitigate against input error etc.

o IF the Applicant fails again, they will be encourage to Apply directly via selection of lenders, reflecting current ‘Credit Comparison Site’ models.

3 IF Applicant

FAILS CAPACITY

The applicant will be prompted to re-confirm Data Inputs 7-14, mitigate against input error etc.

o IF the Applicant fails again, they will be encourage to Apply directly via selection of lenders, reflecting current ‘Credit Comparison Site’ models.

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3.3 PROCESS FLOW EXPLANATION - 2A

The 10 Data Fields that will be provided to participating lenders include:-

Data sourced via… Field Definition

Credit Bureau Credit Bureau Score Bands Excellent, Good, Average and Below Average

Credit Bureau Match Exact, Strong, Possible, No Match (ie. No Match or New to Bureau < 12 Months)

Applicants

First Name

Middle Name

Surname

Date of Birth

Current Residential Address

Current Balance seeking to Transfer ($)

Total Net Monthly Income Applicant Declared Salary + Other income

Online Credit Broker Monthly Disposable Income Based on:- a. model adopted by Online Credit Broker b. Applicant Declared data

Loan Purpose

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3.4 PROCESS FLOW EXPLANATION - 3A

Based on 10 Data Fields, participating lenders will be required to make the following decisions:-

Decision # Decision Actions

1 Approve or Decline applicants Credit Enquiry

IF Decline, no action required If Approve, Lender will update ‘Online Broker Panel’ with

o Indicative Comparison Rate IF the applicant requested Loan Balance Transfer, outline

Comparison Rate% that applies to BT. o Loan Amount

IF the applicant requested Loan Balance Transfer, what portion of will be accepted by Credit Card or Loan Amount.

o Supporting Documentation – to Satisfy Verification of Identification, Employment, Income and Resident Status

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3.5 PROCESS FLOW EXPLANATION - 4A to 4B

Online Brokers Costs per Lead are outlined in below matrix. These costs 1. are based on the Strength of Bureau Match and Credit Quality. 2. designed to cover costs associated with servicing the site.

Lead Costs will not be payable until application is submitted and conditionally approved by chosen lender via the ‘Online Broker Site’. 1. IF Application Fails

Minimum Serviceability Criteria OR Credit Bureau Match

.. THEN applicant will be referred out to tradition style ‘Credit Comparison Site’ models. No ‘lead’ costs apply.

Note: Costs per lead as ‘placeholders’

Credit Bureau Match Strength

Exact Strong Possible No Match (New Bureau Or No Match)

Credit Bureau Score

Excellent 35 cents 25 cents 15 cents

Good 35 cents 25 cents 15 cents

Average 20 cents 15 cents

Below Average 20 cents 15 cents

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3.6 LIMITATIONS TO ONLINE BROKER MODEL

Limitations Explanation

It excludes applicants with Insufficient Credit Histories and or Inadequate ‘Bureau Match’ strength

Applicants with the following attributes will not be eligible to apply via the ‘Online Credit Broker’ model:- New Credit Bureau OR Where Credit Bureau could not be adequately Matched.

Instead, these applicants will be routed through traditional ‘Credit Comparison Site’ models where they will have the option to apply directly to their chosen lender.

Unsecured Loans (Consumer Credit Cards and Unsecured Personal Loans)

These sites will initially service the traditional ‘vanilla’ consumer segment, consumer Credit Cards and Unsecured Personal Loans. Overtime, the ‘Online Credit Brokers’ will span out to include other consumer product offerings, Secured Personal Loans and Consumer Mortgages. These products are inherently complex but these challenges are not insurmountable.

3.7 CHALLENGES TO ONLINE BROKER MODEL

Challenges Explanation

Full, or near Full Participation to comprehensive Reporting

The absence of a robust and representative ‘Comprehensive Reporting’ Credit Bureau will simply undermine government’s efforts to introduce credible responsible lending standards. So if existing voluntary arrangements continue to lead to inadequate participation, especially where major credit lenders are concerned, then some government intervention is logical, if not inevitable.

Reliance on traditional ‘Application Credit Scoring’

Emergence of Comprehensive Reporting has not, in and of itself, diminished the relevance of traditional ‘Application Scoring’ methods. Over the years, ‘Application Scoring’ has enabled credit risk departments to better assess ‘risks’ through improved identification, measurement and management.

But central to this ‘online credit broker’ model is the notion that the ‘Credit Bureau Score’ will provide a robust measurement of risk, particularly where Credit Applicants have built-up significant Credit History.

Where ‘positive data’ is made available, Risk departments will need to make a judgement call: do they continue to lean on traditional ‘Application Scores’ to measure applicant credit quality, and in doing so, requiring

applicants to apply via ‘long form’ applications? OR do they to readjust their scoring strategies to optimise the benefit in this new technological economy?

Credit Lender Participation

Appendix 2

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3.8 COMPARABLE ONLINE MODELS

Models Explanation

Unsecured Credit Comparison Sites

Cluttered with Credit offers

These credit sites are cluttered with Credit offers. For Credit Applicants to be aware of the absolute best deal available to them, they will need to:- Apply with the majority of lenders, meaning filling out countless application forms .. then await their response, Approved or Declined. If it has been ‘Approved’, at what Loan Amount and Rate.

Submitting multiple applications across the available list of Credit providers within a brief period in time is not only prohibitive, it will also have a negative impact to their Credit Score.

Not supportive of Risk Based Pricing

Now that lenders are beginning to implement Risk Based Pricing at Acquisition, the promoted ‘Minimum Baseline Rates’ will not be assigned to all Credit Applicants. So applicants who believe they deserve the ‘Minimum Baseline Rate’, or near Baseline Rate, they will most likely reapply via alternate lenders to secure the loan that they think best reflects their Credit Worthiness.

And for lenders who are not prosecuting Risk Based Pricing at Acquisition, they are indirectly penalising the Low Risk Applicants by not calibrating their Interest Rate according to Applicants Risk profile.

These sites have served their purpose. With the introduction of this major market disruptor, the belief that these sites will continue to exist and stay relevant is quite simply unsustainable.

Online Mortgage Broker Sites

Compared to Online Broker Model, these Online Mortgage Broker Sites are limited in product offerings, Mortgage Lending only. charge Upfront Costs to Credit Applicants before ‘application bid’ is submitted. do not utilise the applicants Credit Bureau file to calibrate their ‘Interest Rate Offer’ do not offer applicants a higher degree of ‘conditional credit approval’

These sites represent a credible attempt to add greater transparency to the application process, but with their limited product offerings, significant upfront costs levied at the consumer, and a process that does not sufficiently factor the applicants Risk profile, there is room for an alternate model to satisfy increased consumer needs.

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APPENDICES

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Appendix 1 - Glossary

Term Definition

Comprehensive Reporting

Post 12th Mar 2014, additional information is permitted to be collected, held and disclosed by credit bureaus. Once this data is supplied by credit providers, credit history will include both Positive and Negative information.

Negative Data currently collected

1. Personal details – name, address and date of birth 2. Consumer credit information: 3. Credit or loan applications, known as enquiries 4. Overdue debts like payment defaults (paid and unpaid) 5. Serious credit infringements

Positive Data permitted to be collected post 12 Mar 2014

1. Account Open Date 2. Account Close Date 3. Type of Credit Account i.e. Credit Card or Personal Loan 4. Credit limit 5. Monthly Repayment history on credit accounts such as mortgages and credit cards.

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Appendix 2 – “Loss of brand loyalty the real disrupter, says APRA chief”. Source - Sydney Morning Herald, James Eyers , July 30, 2015

The real disruption to banking doesn't come from technology per se but from lower brand loyalty by young customers, who are increasingly willing to put their trust in the latest digital offerings, the nation's top banking regulator says.

In comments that raise questions about the utility of millions of dollars spent by the big banks on marketing and sponsorship, Australian Prudential Regulation Authority chairman Wayne Byres said technology is undoubtedly changing business models, "but technology is not necessarily the big issue; perhaps the most disruptive thing is brand".

"We have a new generation of people who are not necessarily wedded to the old brands. Financial institutions were always built on trust, and those big brands generated a lot of trust. Increasingly, we have a new generation of consumer who looks at a brand in a different way, and trust is placed in many new brands that have become very big, very quickly," he told a panel session on how technology is impacting regulators at the Boao Forum for Asia Sydney Conference on Thursday.

With the digital economy seeing the proliferation of peer-to-peer lenders, crowdfunders, "robo" financial advisers, digital currencies and new payments options such as ApplePay, Mr Byres recognised global technology giants and fintech start-ups are lifting the bar on customer expectations of how banks need to deliver services, which is forcing the banks to become more customer-centric.

"We have retail customers who have an increasingly common expectation that, short of withdrawing dollar notes, you can do your banking and make your payments on whatever mobile device you happen to have in your pocket," he said. "In the commercial area, there is an increasing expectation that payments can be made and received at lower costs and close to real time than has ever been the case in the past."

Banks are being forced to match their big competitors in technology investment, which is just as big a driver as competition from disrupters, he added. "As much there is a fear of new entrants coming in and encroaching on the traditional turf, I think as much, if not more, of that competitive response has simply come from the knowledge that existing competitors are investing heavily and [finding] more efficient ways to do business, so it is not an option to stand still and defend the status quo."

The comments come a day after National Australia Bank created a $50 million "innovation fund" to invest in disruptive start-ups. This follows the creation by Westpac Banking Corp early last year of a $50 million venture capital fund, Reinventure Group, which has made several investments in start-ups offering a superior customer experience. Reinventure Group will be moving into Sydney's new fintech hub, Stone & Chalk. Australian Securities and Investments Commission chair Greg Medcraft said during the same panel that Stone & Chalk is a member of ASIC's new Digital Finance Advisory Committee, which will advise ASIC on how it should engage with innovative business models. Mr Medcraft also said ASIC is considering seconding its staff into Stone & Chalk as part of its efforts to get closer to the start-up community and adapt regulation to allow their businesses to get off the ground.

"We want to help business harness the opportunity that comes from digital disruption and financial innovation," Mr Medcraft said.

http://www.afr.com/business/banking-and-finance/financial-services/nab-ventures-created-to-invest-50m-in-fintech-20150729-gin0tg

unsecured credit broker - concept overview

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