What you'll learn
- Balancing agility and robustness in platform design.
- Case studies of successful collaborations between fintechs and traditional banks.
- Data-Driven Decision Making in Digital Lending-Predictive analytics and its impact on loan approval processes.
Transcription:
Miriam Cross (00:10):
Hi, welcome to Digital Banking 2024. My name is Miriam Cross and I'm a Technology Reporter at American Banker. The session is about Digital Lending, Building a Scalable and Agile Digital Lending Infrastructure, and we're going to be spotlighting a credit union in the Houston area, T-D-E-C-U. We have three panelists here who can talk about different angles of the digital lending process. I'll ask each of you to introduce yourselves. What's your name and the organization you're coming from? I'll start with you, Karan.
Karan Maini (00:41):
Hi, my name is Karan Maini. I Lead up Banking and Financial Services as a segment for Persistent Systems. It's a systems integrator being in the business about 35 years. What we help organizations do is figure out how does integration work across the whole ecosystem? What all do you pick? What all do you not pick, and how do you enable a seamless customer journey? So we'll talk a little more about that. I've worked with about 60, 70 odd financial institutions across the US, Canada, Australia, and Singapore. So being privileged to learn a lot more about challenges that all of these are faced.
Ashish Chopra (01:21):
Hi, my name is Ashish Chopra. I'm the new incoming CIO and CTO for Texas Dow Employee Credit Union. Six months into it. Prior to that I was at Wells Fargo for 15 years. I did my startup with sold it to target pharmacy and then some consulting experience. The exciting thing about Texas Dow Employee Credit Union is that we are very aspirational. We are building the future bank, the digital bank, AI based. That's what we are working on. That's a journey which we have undertaken, and at this point we are on step one, but that's what we want to be within three years launch our complete AI foundational digital bank. Thank you.
Debrata Das (02:01):
Hello everyone. I am Debrata Das. I work for Texas Dow Employees Credit Union with Ashish. I joined them two months ago as their Head of IT Architecture and Engineering. So a lot of the vision that we have around the digital bank, we call it the future bank and the member centricity that we're going to go along with it. I have the opportunity to make it real and we have been having a lot of conversations around how to really enrich the member experience, how to bring in the best of technologies to blend them all together, and happy to share our learning so far and taking questions from all of you. Thank you.
Miriam Cross (02:36):
Calling at the digital bank is very apropos for this conference. Karan, can you give us an overview of the digital lending landscape in banking and credit unions?
Karan Maini (02:46):
Sure, I'll take a stab at that. So typically financial institutions have found bringing deposits in is the easier part. Lending was turning out to be something of a journey for them, them you could do a lot with credit cards with the personal loans, but the minute it moved into small and medium businesses and the complexities around it, and then when you go into institutional lending, it's a whole different ballgame. So there's a very wide spectrum that's been carved out and over the last, I guess three or four years, we've also seen the emergence of embedded finance as a serious, serious trend to note the numbers keep changing. So when I started tracking it, it was about 26 billion as a market. Today, I'm hearing numbers in trillions that people are anticipating in the next five to seven years. So just to qualify where we've seen the market go, typical acquiring business for cars, you literally used to be pennies on the dollar and there was not much happening in that space.
(03:48):
People started innovating. amex came up with amex offers. It became about what card you had, what kind of rewards you had. That's how you've generated loyalty. And suddenly you had the emergence of buy now pay later. Now the whole conversation moved from who had what card in their wallet to the checkout, and you could pick an option on the checkout, which was not even a credit card in your wallet. So from that standpoint and affirm alar, they started coming into the market and you had the emergence of these non-traditional lenders in the personal finance space. Pretty soon the trend caught on and they started looking at alternative segments. They started looking at how do you qualify what is prime versus subprime versus non-prime and the kind of data sets they use, they use a lot of alternative data. They started figuring out what their risk exposure would be, and you had a whole lot of business lending emerge on the back of that.
(04:42):
So we work with a bunch of clients who lend into folks who need short time, short-term capital in order to let's say run professional practices around being dentists and doctors and lawyers. And that whole trend caught on. So you had buy now pay later on the financial side, you had short-term capital on the other side, and now lending was suddenly catching attention because traditional financial institutions suddenly found our wallet share is disappearing. And while the trend was small, the longer term ramifications of this was a very slick customer experience that was drawing people and retaining those customers. So you could have your bank account with one of the large ones, a Bank of America, PNC, but all of a sudden most of the servicing that was happening for lifetime events was happening outside of these large financial institutions. So just from macro view where we are in 2024, you got threat from somebody who maintains customer experience.
(05:40):
It could be a FinTech, it could be a non-banking financial institution. The FinTech has the ability to get sponsor banks. The sponsor bank is essentially saying, I invested all of this CapEx into building out regulation, KYC, a whole lot of stuff that allowed me to onboard customers. I'll lease it out to you and you pay me a fee for it. And that's the sponsor bank concept. And subsequently what ended up happening is that these banks then started their transformation journey. I'll wait a little late, but they're now trying to put the war chest to use to now compete in that market. So there's almost a competitive collaboration that is happening right now, but very interesting time for sure.
Miriam Cross (06:21):
Ashish and Debrata, can you tell us what TDECU is doing with digital lending?
Ashish Chopra (06:25):
So before I go into digital lending, something Karan was talking about. We are in a digital banking conference, and as we sit here, the definition of banking is changing. I don't know whether we realize this or not. More than right now we are in a high interest rate environment because of that money staying in the banks or credit unions and fintechs. But still we have $3 trillion in cryptocurrencies. Starbucks is not a traditional FinTech, but it has 1.5 billion on its books, which it is using. Its zero interest money on its books, which it is using for creating more Starbucks. So the traditional financial model of banking is changing, evolving with ai, with quantum computing, there's a lot of change ahead of us just wait five years as the interest rate goes down, there's a massive banking disruption on the horizon. That's one. Even digital, when we talk about digital, a lot of things which I was hearing in this conferences is how do I digitize a process?
(07:24):
Digitization of a process was 20 years old concept when you were moving from a brick and mortar process, building it digitally. Right now it is do you have a digital native process? What it means is, are you starting with a blank canvas? There are a lot of things which used to happen sequentially when you do data banking, now you're depositing, then you do compliance checks. Then you look at what kind of spending habits to have. There was a sequential event which are happening right now. I can bake my risk and compliance, right? Real time into what activities which are happening. There was a time it used to take one hour to open a bank account, you have to sign a bunch of documents an hour. The Apple Bank, within 24 hours with couple of clicks, you could open a bank account and they got a billion dollar deposit.
(08:11):
The complete experience of what digital means is changing. There used to be digital process or digitization of process, but now we are talking about which are digital native process. These two are different concepts. So I wanted to ensure we all are grounded into those concepts that banking, as we say, is changing digitization, what used to mean 20 years back and what now it is is changing and that is changing the landscape of where we are today. And if we are not cognizant, if we cannot quickly adopt or change or be agile, a lot of us will be lagging behind in this ways. So something which currently were talking about.
Miriam Cross (08:50):
So how does this come into play for T-D-E-C-U?
Debrata Das (08:55):
I guess one of the realizations that we have had and being in the industry for such a long time is that, and going back to the point that Karan and Ashish are making, banking is no longer just an activity anymore. It's part of your day-to-Day life fabric. Whether you are at the grocery store, whether you are at the pharmacy, banking is all around you. We just have to make our presence fail there. A couple of quarters ago I was working with another company and one of the things that we were doing there was if a person is going to the pharmacy to get their medication refilled, you can monitor what they're spending on and you can also make them suggestions that looks like you have been having this medication for a while, maybe it's time for you to add to your health savings account and up that contribution so that you can save for this if things were to go bad.
(09:45):
So we are taking a very financial solver kind of an approach to reaching our members and truly being available at every event in their life, whether it is a life event or a day-to-day event, how we can surface ourselves in the grocery stores that they're visiting. How can we surface ourselves in the gas stations that they're using on a daily basis and how we are ready for them available so that we can solve their financial problems of the day and for their life events. That's the approach we have taken. And the other thing I'll mention is the journey that we are on is that of co-creation, which means that we are not the only ones who are building it, everything from the ground up. We are a smaller credit union. We do not have all the stuff in the world to do the magic that an Amazon would do on engineering side, but we look forward to collaborating with our FinTech partners, with our system integrator partners and even our members. We are in the process of re-imagining our branches where we will have some of the innovation being surfaced to the members and we will get some input from them about how is this manifesting itself in their lifestyle and how can we be more of a financial solver for their life events. Thank you.
Miriam Cross (10:56):
Thank you. So let's talk about a specific project you're working on. You're working on a co-branded credit card. Can you tell us what that's going to look like and what you feel will make it unique?
Ashish Chopra (11:08):
So co-branded credit card is something which we're working on. One of the things which we want to differentiate ourself in the market is can someone scan a cure code and in less than a couple of minutes be onboarded as a credit card customer? That's a starting point. And at that starting point, we are building a customer 360 for that customer. But as we are onboarding that member in credit union space, we call our customers as members. So as we are onboarding that member, can we say that the member onboarded for credit card is on onboarded for practically all products? Can other products be one click activate for them? If you are doing the right KIC, if you're doing the right fraud checks, that experience of onboarding of a one product could be as simple as you've onboarded that member for all possible products and tomorrow if they want to take other products, it's a simple one click activation, right?
(12:01):
So we are reimagining every step of that process so that you have a lot of information about a member, but the customer 360, we start building from the first interaction and then we go on and looking into different aspects of data gathering about that member. What are their spending habits? But this onboarding is the most critical part. Another thing, some of the demographic which we operate with a traditionally bank may operate with a demographic which is serviced by USPS. You get to mails delivered by USPS, but we also have demographic which is not serviced by USPS. How am I going to check their address? USPS doesn't allow me to check address because they are not serviced by USPS. I have members if I verify them through mobile phone. And my dear friend and my peer, she's sitting in the audience, she was trying to onboard using a mobile phone and we sent her a text message, but her mobile phone is part of a family plan and because it's part of a family plan, a different name, she was not authorized. So how could you have adoptive fraud experience that if you find out there is one challenge, maybe an address check or maybe the mobile ownership, you cannot check check it. Can your fraud adopt and evolve and look into alternate data sources? So that is the kind of experience we want to build into this credit card experience. This is just the starting point. A lot of things at every step of the way, we are imagining what that credit card should be.
Miriam Cross (13:37):
So how are you making that possible? How is it that somebody would be able to scan a QR code, apply for a credit card, get approved instantly, and be in compliance with all KYC and other regulatory checks?
Ashish Chopra (13:51):
So that's the how part which the breather can share more, but we are looking at multiple solutions, but we are also going to build our own algorithms. Machine learning, which is going to,
Miriam Cross (14:04):
Sorry, your own what?
Ashish Chopra (14:05):
We are looking at multiple solutions which bring together, but we are also building our machine learning algorithm, which will be adaptive in nature that if you know a member is not able to come through these five checks, can there be alternate sources to verify and validate those checks and balances? The intent is to ensure the bad actors are staying out of the ecosystem, but the good actors are able to flow through it. And sometimes through your traditional checks and balances, those good actors are not coming in. So that's a distinction we want to play into.
Debrata Das (14:38):
Yeah. So continuing on how side of this equation, we all want to have the best member experience. We all want to do the best thing for our members and customers. The way we have taken, the approach we have taken is founding our solutions based on some guiding principles. One of the guiding principles that we have embraced is how can I build a solution or bring in a partner who can help us create what we call as composable solutions, which means that I'm able to get individual pieces, Lego pieces of the whole solution and then stitch them together so that tomorrow if the option to do something else with the credit card product, maybe I want to offer an additional feature where I'm going to give them more favorable pricing because the member has been with me for 10 plus years. I can do that in a more configurable manner, in a more no-code manner rather than having to change everything and go through the process of deployments and inheriting that engineering challenge.
(15:39):
That's one of our guiding principles for building the new solutions. The second thing that we are doing, going back to Ashish's point, making the solutions more adaptable. What can we learn from the behaviors of our members who are using this? What can we learn from the security signals that we are getting as they go through the AML checks as they go through the KYC checks and how can we make it less of a friction and then adapting the system around it. So that going back to the composable aspect of our platforms, that's a big thing for us. How do we make it adaptable? And then use the composable architectures to really change behaviors of the system in a fly without having to do a whole lot of re-engineering. The third piece that we are doing very differently is educating our own staff about how they should be embracing these digital technologies in their day-to-day and how they can take advantage of these tools as they interact with the members and solve their problems for them more to chat, but that's where we are headed at this point.
Miriam Cross (16:38):
Karan, as you're listening to this, what is standing out about TDECU'S approach? What have you seen with other banks or credit unions or what's unique?
Karan Maini (16:48):
I think frugal innovation to start with frugal innovation. So just the ability to do all of this costs money. Larger banks have an advantage. They've got a war chest. They've got the ability to put that money into an acquisition, into partner development, into co-creation. Smaller institutions have to pick their battles and they have to win all of them. So I think it's a deck that is already stacked from whatever T-D-E-C-U is trying to do. There is obviously a whole lot of people who've done that in larger institutions, they've been successful six, seven years back, TD Bank bought a company called Layer six in the AI space. They spent a hundred million dollars on it at that point in time. People were asking why a hundred million dollars for a single firm of 16 engineers? The ROI was in under a year, and at that point in time, they wanted to be at the center of their customer's lives for life events as a bank.
(17:51):
So six, seven years back, that formula worked for them. Today, if somebody does the same thing, it probably won't work. It's a very different time and place. So where innovation really comes in is how do you elevate the overall offering from a financial product standpoint and your technology product. They both go hand in hand. They both have to be extremely attractive for a customer to come over to you and to stay with you. The other aspect is you have to identify points of friction. Sometimes we overlook them. We just say this is mid office, this is back office. It's something that we'll deal with internally. But a point of friction is a point of friction. It takes away time. It includes effort into it and it costs. So when you start doing the math around it, that's where I think smaller institutions are doing it in surgical precision and they're getting a lot of it. Right.
Miriam Cross (18:44):
Ashish, I know you spent 15 years at Wells Fargo, so how are you making this work at T-D-E-C-U? What's different about getting a project like this off the ground than it would be at Wells Fargo?
Ashish Chopra (18:57):
Wells Fargo has a massive watch as they can do whatever they want. The money is not a problem. So I was working on a 10 year transformation journey for them, and I was in year three when I decided I could do things faster. But having said that, I learned a lot in Wells Fargo in terms of I was running their FinTech practice and something for everyone. The innovation in banking is happening more outside United States than we would prefer to have happen in United States. The kind of innovation we were seeing, most of the core banking gen three providers are coming out of either South America or Europe. The payment innovation, which is happening in Asia, it's at another different level in Africa. They never had computers, they stayed away, started on mobile phones. So the kind of innovation, the ecosystem they're exposed to, we have not seen that innovation yet out here.
(19:51):
In fact, in Europe, I was talking to some of the analysts in the morning, they are working on real time mortgages. We are struggling with real time payments and they're working on real time mortgages. Can you see the evolution or the difference, what we have right now? And I think at some stage as the interest rates go down, which will take three to five years, I think there's a massive transformation which is waiting to happen, disruption waiting to happen in US market. And that's what I could see that when I was working through Wells Fargo, I was exposed to all those fintechs and what is happening all over the world. And that is the experience which is helping me do what I'm trying to do right now.
Miriam Cross (20:27):
Karan, I'm curious, do you agree that a lot of innovation is taking place outside of the US?
Karan Maini (20:34):
Yes. I think Ashish is very right when he says that. So this was an example I learned about a number of years back. There's a bank in Germany called Fido, and the checking account in the US does three functions. It's money in, money stays money out. Fido does 16 functions. So if you're a customer who is, let's say, looking for a cash advance and you wanted to apply for a short-term personal line of credit, if Fido could not underwrite it, they would toss it over to a marketplace. So they were doing syndicated. If you were in a new city and you didn't have your debit card on you, you could authenticate with several other forms of identification, walk into any bank's ATM network, withdraw money. So the kind of stuff that they had baked into the offering was way more than what traditional finance dictated. And this is a number of years back. Fast forward now you have people like Apple buying a company like Credit kudos because they want to know more about spend propensity. They want to segment customers transactions. They want to know more about what are the next generation of customers going to look like. And there's generational transfer of wealth. There's a new breed of digital natives who are emerging. The customer segment doesn't look the same anymore. So absolutely.
Miriam Cross (21:53):
So Ashish and Debrata, when you're getting this COBRA and a credit card off the ground, have you been looking at vendors outside of the us? What's the split been like?
Debrata Das (22:07):
We have looked at multiple vendors, and I think for the credit card specifically, we are looking at more US-based partners, primarily because the regulatory requirements are very specific to this country. And what we are also finding is that many of the European partners, as good as they are on the technological front, they have not quite made the leap to adapt to the US regulations at this point. But again, going back to the guiding principles, we are keeping the architecture open. So tomorrow, if there's a European player who is better suited for us, we can make the switch very, very easily.
Karan Maini (22:39):
I think the modular approach of technology that we've all learned about that word modular, I think it's broken into several facets. Now. You have the ability to do plug and play. So everything is a fabric. You have the ability to talk to any FinTech, it's all software as a service. You can turn it on like a tap, you can turn it off like a tap. The integrations that you build are reusable. In fact, when people say you talk about cloud a lot, so there is no dependence on any one cloud. You actually have cloud nativity built into how you write code today. So you could actually exist on three different hyperscalers, three different clouds, Azure, G-C-P-A-W-S. But if you change any to any, the end user doesn't know that difference. And that's what Cloud Nativity is turning out to be. So from a technology standpoint, I think it's the most vibrant ecosystem we have ever seen.
Ashish Chopra (23:34):
And I don't know if everyone has heard about the buy-in framework, which provides that modular approach. So we call internally the Lego Bank of the future. But having said that, in Wells Fargo, I remember we launched that Fargo AI app, which if you're a Wells Fargo member, you could use that Fargo app. We were able to form conceptualization to the launch to family and friends. It was less than six to eight weeks launch of a product. And a full blown launch was less than three months. That was possible because of the modular architecture. So that's the advantage we get. Your speed to market drastically increases, and as you become more modular, you can plug and play different technologies.
Miriam Cross (24:17):
So what stage are you at with the development and launch of this co-branded credit card?
Ashish Chopra (24:24):
We are just getting done with the planning part. There are other changes which we are planning to do along with this. So our plan is right now to launch it sometime in Q4 of this year.
Miriam Cross (24:36):
And what are your goals and who are you trying to reach?
Debrata Das (24:41):
We are trying to reach mostly within the state of Houston, I'm sorry, state of Texas, but we are trying to reach to a different demography, which is going back to my point about being embedded in your lifestyle, right? Emerging in the gas stations, emerging in the supermarkets. That's the kind of audience we are going after. So it'll be a much wider spread rather than just the counties where our branches are today. So essentially extending our reach into the digital realm and surfacing ourselves in the day-to-day life of our members.
Miriam Cross (25:13):
And Karan, you were talking earlier, you mentioned TD Bank in layer six earlier and how they saw a return in less than a year. So how do I guess, financial institutions of all sizes, but maybe specifically credit unions or small financial institutions, when they're taking on projects like this, how do they calculate ROI?
Karan Maini (25:33):
Revenue uplift is a very simple principle member acquisition. I want to acquire X many number of members or clients in a particular product line by this timeframe and then servicing around it. What does it give me as cross-sell upsell opportunity to get more product into them. So the lifetime value of a customer becomes a very significant metric to track when you're doing any of these initiatives. A lot of credit unions have found success with newer age onboarding tools because earlier they were looking at what came out of the box and now they can pick a particular partner they can onboard faster. It's a way better experience. So they're obviously seeing benefits come out of that. So like I said, remove friction, get more customers equates to dollars.
Miriam Cross (26:25):
And how do you feel this will give you a competitive advantage?
Ashish Chopra (26:29):
Oh, absolutely. The experience and the feature and the hyper-personalization, which we are planning in this credit card. At least it's not seen in the Texas market. So it'll definitely be a game changer. But not only that, as the ROI party were talking about, I was thinking you don't make money after launching a product when you're building that product. You need to think about the cost also. So some of the things which other banks have done it, again, coming from Wells Fargo, I've seen this happening, but there was a bank in Germany which was doing a modernization and guess who funded their modernization? One of the cloud providers because they wanted to be part of that journey. So if you can make, there are a lot of ways you can get this self-funded, which will impact eventually your ROI. So it's customer acquisition. Absolutely. Customer experience opening up new demographic, new segments, absolutely all that plays into it. But if your cost of creating that product is lower, you are reaching your ROI faster.
Miriam Cross (27:32):
And we focused on the credit card, but opening it up, what else is TDECU doing in the realm of digital lending?
Ashish Chopra (27:41):
I would only say this at this point in time, that we are building a brand new AI-based digital bank of the future. This is a first step and got more to come.
Miriam Cross (27:51):
Okay. Brings us, we have two minutes left. Is there anything else any of you would like to add?
Debrata Das (27:59):
The one thing I will say is that the concept of the digital bank is very much founded on the openness of what we can build with it. So to the point that you've been making about what else would we be doing with lending at this point? We are open to bringing in any kind of innovative lending products. We are open to bringing in new experiences within the card itself. And even reinventing how a traditional checking or savings account can be. That's our vision, that's our goal. And we are putting the engineering foundation below it so that we can be very, very creative and innovative about how we can shape this products based on the financial journey that we want to support for our members. So much more to come. So look out for us.
Miriam Cross (28:40):
I look forward to seeing how this vision comes to life. Thank you all for being here.
Ashish Chopra (28:45):
Thank You.
Debrata Das (28:45):
Thank you.