Forgiveness will be a major theme this coming year. Millions of American are mired in debt and struggling to meet their financial obligations. Debt continues to mount, while consumer demand for new products and services remains constant.
Small businesses, particularly those deemed nonessential, have been pummeled in the pandemic. While PPP loans have been available to bridge the gap, many businesses are counting on forgiveness of those loans to stay afloat. There are so many outstanding questions about the loans being made and the payback periods. Concomitantly, small financial institution lenders will be hit hard as the collections business falls on hard times.
Amid every challenge arises an opportunity. Over the past 10 months the payment industry has seen several products and services of bygone eras that have been reconstituted, repackaged and positioned to help customers and small businesses to manage their finances and cash flow.
The good news is that fintech companies bring great innovation to these traditional services in the form of new risk models, intelligent data-gathering using APIs, and streamlined processing using AI and machine learning. Here are a couple of use cases describing how fintech is working behind the scenes to tackle debt issues:
New credit scoring models. In recent months we have seen a huge uptick in Buy Now Pay Later (BNPL) programs. These are nothing more than a reincarnation of lay-away or installment plans whose carbon dating tracks back to the 1960s. Merchants have led the charge in implementing these programs, their incentive largely to build a direct payment relationship with the customer and to circumvent mounting interchange fees from the card brands. The untapped market for BNPL targets millennials and the underserved, whose appetite for consumer goods and services remains whetted despite the financial squeeze of the current market.
Interestingly, the application screening process for BNPL is notional. Although many buyers have no preexisting credit history, no credit scores are used and no customer verification is performed. The BNPL service providers hedge their bets by cutting off enrolled customers if they miss a single payment.
Fintech works behind the scenes supporting the data aggregation for these BNPL programs. They do a deep dive into the data by tracking the repayment history on these buyers, many of whom are otherwise unknown in the credit scoring world. One of the major benefits of BNPL to the financial service industry is that now we have a revitalized way to bring more consumers into mainstream banking. Furthermore, there is a revenue-generating opportunity for financial institutions and fintech to package this credit history information for sale (perhaps through an industry consortia) to the secondary market. Long term, this supplemental information will enable all stakeholders to make better lending decisions and support enhanced KYC.
Debt management servicing and collections. Companies are developing new strategies for servicing customers and businesses alike, using specialized debt settlement or consolidation programs in conjunction with a credit agency. Essentially, the debt servicer develops an individualized payment plan including proposed monthly amount, interest rate and payback terms. After making payments consistently for the agreed upon term, creditors typically reinstate the client as creditworthy.
Fintech brings innovation to debt consolidation loans, repayment plans and collections. APIs provide access to intelligent data from disparate sources, thereby creating a more comprehensive picture of the client’s financial well-being and predisposition to repay. Fintechs are creating debt settlement strategies with options tailored to meet the unique repayment needs of the client. Enhanced reporting tools enable better monitoring and control over the client portfolio. Fintech is also using machine learning and AI to develop new risk models for debt collection. These predictive models analyze the portfolio determine patterns of payment history, enabling debt collectors to more accurately determine the value of the paper (i.e., debt obligations) being bought.
In the modern era debt forgiveness means finding new, technological ways to say you are sorry. As an industry we must bring new buyers into mainstream financial services and get troubled buyers back on track again. The financial service industry must continue to rethink traditional debt services and leverage from the innovation provided by fintech.
