Consumer Banking is fundamentally about lending and non-bank lending (whether called AltFi, Marketplace Lending or P2P Lending) is already a mature market. Consumer Banking has taken 73% of Fintech investment to date (vs only 10% each for Asset Management) and Insurance) and has had the first IPOs and the first big blow ups. Now we are seeing the tipping point for challenger banks as well as the tipping point for incumbent bank branch closures. Looking past all the noise, we seek to find where the puck is headed and this took us to the unlikely Fintech capital of Hamburg to find out what Kreditech is up to (apart from recently closing a $103m Series C round).
Fraud and deadbeat detectors
Detecting Fraud in Insurance Claims was the subject of our post yesterday about Shift Technology. It obviously also matters in Marketplace Lending because scamsters will flock to any market offering “few questions asked” payment. Frictionless and fraud-free is tough.
Fraud detection is all about spotting suspicious patterns. This can be as simple as clues that it is a bot or a human. For example, spotting a lot of copying and pasting could signal a bot. Spotting deadbeats (aka high chance of default) is also a pattern matching job. For example, a person who goes straight to the sign-up page without reading the terms might be desperate for money (or a crook).
Kreditech claims to track 20,000 data points such as this.
For example, mining social media data can tell you if they are friends of somebody who who has reliably paid back loans. Some signals are obvious such as level of education and quality of employer (the guy who left Stanford to work at Google is probably a good credit risk).
Some are subtle and the sort of thing that old fashioned human bankers used to do such as seeing somebody getting drunk a lot or gambling in casinos. This can be viewed as invasion of privacy, but the key is that the consumer who wants the loan gives permission and credit card companies already have this data.
The key is seeing the connections, not a single data point. The example that Kreditech give is that behaviour that might be suspicious in a factory worker — applying for a loan from Hamburg when their job is in Stuttgart — might make perfect sense for a traveling salesman.
By doing all this automatically, Kreditech claims the “Lowest number of fields in the industry” – which is key to conversion.
Underbanked is a better market than Overbanked
Lenders are credit quality arbitrage hunters. They want high credit quality borrowers that are viewed as low credit quality borrowers by the mainstream lending market. As in any investing, you have to be both contrarian and right. Contrarian and wrong is an obvious error. Right and mainstream just means tight margins; everybody wants to lend to a AAA Corporate or a guy who just left Stanford to work at Google.
Now look at emerging markets. Mainstream perception is that lending here is high risk. It’s all foreign and strange and the credit bureaus don’t operate here. Yet, this is where the middle class is growing rather than shrinking. This is part of our First the Rest then the West thesis and a reason why we devote so much attention to the Underbanked market (index to Underbanked posts here). Which market would you prefer – a market where customers are spoiled for choice and competition is fierce or a market where customer are growing fast and have few choices?
Poland – laboratory for consumer banking innovation
Kreditech acquired a Polish company called Kontomierz in January 2015.
Poland is a laboratory for consumer banking innovation (as we detailed a year ago here).
Kontomierz was an early pioneer in open bank APIs. This is driven by EU legislation and is the key to Kreditech and the future of Marketplace Lending.
PSD2 and Open API Banking is the key to Marketplace Lending
Profit lies at the intersection of market demand, technology enablement and regulatory driven change. We don’t need to say more about market demand (strong on both borrower and lender side) or technology enablement (the Internet changes everything). The only question is who will seize the day – incumbents or upstarts? This is where regulatory driven change holds the key.
PSD2 (defined in November 2015) enables a third party provider (TPP) access to accounts held at Banks via XS2A (Access To Accounts). For TPP read Fintechs and Challenger Banks (including Marketplace/P2P Lenders). PSD2 mandates that banks must provide access to customers of the Fintechs and challenger Banks. More on PSD2 next week (will be RegTech Week on Daily Fintech).
The reason this matters to Kreditech is that for all the talk of 20,000 data points, AI, machine learning, data science etc, understanding what a borrower has in their bank account (in and out and balance) is key to understanding their credit worthiness. If this data has to be released by banks, it will crack open the market for lending to marketplaces and tech driven originators and challenger banks.