Getting personal with APIs to unlock lending
Lending money is a risky business. The biggest challenge for any lender is how to balance service (the drive to serve as many customers as possible) with risk (the possibility of a customer defaulting on their loan payments).
This calculation is made using a mix of information provided by the customer, insights from previous experience and, increasingly, predictive modelling to assess likely outcomes. In every instance the raw material is customer data, but traditional data gathering acts as a limiter leading to many customers being denied credit, or not offered the optimal loan.
Integrated approaches to data and approvals can save time for lenders and unlock liquidity for customers.
Balancing risk and service
Traditional risk assessment is always a compromise. The lender wants to source as much data as they can, but there are limits on what is possible. If the process takes too much of your team’s time, it is no longer profitable. If it takes too long for a customer to submit information then there is a strong chance they won’t finish the process.
Recent research shows that 38 per cent of UK businesses have chosen to abandon a banking services application in the last year due to “slow due diligence processes”. This is a major concern when almost three in five SMEs have experienced problems with their cash flow and 82 percent of businesses failures are due to poor cash flow management or poor understanding of cash flow.
The reason is that many banks lack the technology to gather risk data efficiently. According to a report by the Financial Conduct Authority (FCA) many banks are still running legacy systems, with nearly 50% of banks not upgrading old IT systems as soon as they should. This prevents efficient data gathering, leading many lenders to err on the side of caution and deny credit to customers who would otherwise be strong candidates.
Accelerate service with APIs
Use of APIs to expand the range of insights available when making lending decisions is key in rapid decision making. APIs accelerate the lending process by bringing in existing data points from third-party sources. Not only does this enable the lender to grow its margin, but it also widens the range of insights available and provides the chance to go deeper on key metrics.
Instead of lending at a portfolio level, lenders can tailor decisions case by case. For example, if a lender were analysing the financial stability of a prospect they might traditionally look at capital saved, incoming revenues and industry benchmarks to determine risk, as these are readily available metrics that can be gathered easily by a team or the customer. However, this might not always give the most accurate picture of the client.
By using APIs lenders can draw on a deeper level of knowledge that goes beyond metrics to look at behaviour. By connecting with third-party banking or accounting apps, lenders can analyse debt management across credit cards, payment terms on businesses expenses or real-time and project cash flow.
Now that more businesses than ever are using financial apps and online tools, there is a wider range of data available to assess financial credibility, and with APIs these checks can be done instantly. With an expanded range of insights, lenders can add more detail to client profiles and assess risk more accurately, lending to customers who might have otherwise not qualified for a loan.
Widening Access to Capital
As consumers and businesses move their financial lives online there will be more data than ever to be mined for customer value, especially with the introduction of open banking. However, more data doesn’t necessarily mean more understanding on the part of users.
APIs will be the essential links between processes but success will rely on developers choosing the right insights that can augment and improve customer experience in key areas, such as lending, to build long term value for users and apps alike.