Aite’s Parrish: Lenders should align incentives with consumers’ best interests

Banks and fintechs alike are figuring out new ways to reach underbanked consumers. Leslie Parrish, senior analyst with Aite Group's retail banking practice, said she hopes to see more institutions align their revenue strategies with consumers' best interests. [toggle title="TRANSCRIPT"] The following is a transcript generated by AI technology that has been lightly edited but still contains errors. Rick Morgan, news editor at Bank Innovation Hello everyone, and thanks for joining this Pulse of the Industry event part, of our new Premium Plus offering. I'm Rick Morgan, a news editor at Bank Innovation. Premium Plus is our newest service that offers exclusive webinars like this, access to our conferences and startup demos. We really hope you enjoy it. I'm joined today by Leslie Parrish, a senior analyst with Aite Group's retail banking practice focusing on consumer lending. She was one of the initial employees of the Consumer Financial Protection Bureau. Her role entailed engaging with lenders and helping to develop the bureau strategy and policies related to small dollar loans offered by banks, non banks and fintech firms. Later, she authored research publications to inform rulemaking efforts on small dollar loans, overdraft programs and debt collection. Before her work at the Bureau, she spent over 10 years working on public policy issues related to financial services, financial inclusion and consumer protection. She's an expert in a number of financial products and services, including student loans, mortgages, unsecured loans marketed to non prime consumers, as well as in debt relief strategies. A lot of very interesting topics, very relevant right now. Leslie, thank you for joining us. Leslie Parrish, senior analyst at Aite Group Thanks for having me. Rick Morgan So it was a lengthy introduction. But I'm sure you know yourself better than I know you. So can you maybe just describe your research and your role in your own words? Leslie Parrish Sure. So like you were saying, I'm a senior analyst at the Aite Group, I've been here a little over two years. And I cover kind of all forms of consumer lending, really any loan where the end user is a consumer, whether that's a mortgage on down to kind of very small personal loans or cash advances. And in that work, I cover kind of all stages of the loan lifecycle. So I'm from kind of pre screening, marketing efforts to bring borrowers in all the way down to collections if the loan goes bad. Rick Morgan Fantastic. So obviously, I think if you've been paying attention to the news, you know, there might have been an election recently. And it's kind of hard not to talk about, well, it's hard to talk about anything without talking about the election, obviously. I was curious, what effects do you see the Biden administration having on any financial technology regulation, from your perspective? Leslie Parrish I think the biggest change will be, there's an opportunity to install new leadership at a lot of the regulatory agencies. And that's pretty much thought to be one of his kind of first 30 day initiatives, especially at the CFPB. And that's the agency that I'm most familiar with. So I can kind of talk mostly about what might happen at the CFPB. So first, I think, you know, there will be some sort of leadership change, there could be, you know, a huge dramatic shift. For fintechs, I think, you know, the CFPB will still be really interested in how innovation can take place, how financial education can be delivered to the public. But I do think there will be a bit more perhaps, kind of healthy skepticism on you know, are all innovation efforts, always good for consumers? Or could they have some maybe unintended consequences, especially for certain protected groups, like people of color, for example, or other groups that have been marginalized by financial services traditionally. I think there will be a little bit more pushback a little bit more of kind of needing to show your work on why that particular innovation is good. But I don't think there will be, you know, dramatic changes that would negatively impact the fintech industry. Rick Morgan Sort of striking that balance, I guess, between using technology to promote financial inclusion, which I know is a big emphasis point for Joe Biden. But while you know, not introducing some, maybe even unintentionally malicious technology that could, you know, include bias lending or some unintended predatory consequences, I guess. Leslie Parrish Yeah. And I think and I think in this industry, you know, most of the intention is usually quite good. It's just as level of well, even if, even if I'm coping to this, what are those potential impacts that I may not be seeing that may not be? You know, something that I would think that could potentially happen or go wrong. So just kind of taking it that next step further. Rick Morgan Earlier on in the summer, I believe it was Joe Biden and Bernie Sanders, they put out a joint policy statement that included the idea of a public credit reporting agency that to promote financial inclusion and maybe add an alternative to the private credit bureaus. First of all, what would the benefits of something like this be and is it actually feasible? Leslie Parrish Yeah, great question. I've been kind of catching up on that issue, too. And, I mean, I think, you know, consumer credit files are just a huge part of people, not only their financial life, but it can really impact their lives in a lot of different ways. Beyond you know, whether they're going to be approved or declined for a mortgage, or, or another type of loan. Credit files are used to screen job applicants or someone should be a potential tenant. And there's some pretty compelling arguments, you know, certain kind of credit algorithms could impact certain groups of people in disparate ways. And the way credit files work right now, you know, they're housing controlled by a very small number of for profit entities, the algorithms that are driving these scores that impact so many aspects of people's lives aren't known, they're kind of in a black box. And a lot of ways consumers can opt out. There are errors that are made, you know, with any large undertaking like this, they're always going to be issues and problems that come into play. So I think advocates are trying to make the case that, you know, a public entity could have incentives that are kind of more aligned towards consumers. Because if it's a for profit entity, you know, they have to drive revenue, and that are creating that revenue, our, you know, lenders and other end users, they're not the consumers whose data that's being used. So I think the arguments are pretty compelling that this would be kind of more of like a, almost like a public utility, rather than a private, kind of for profit enterprise. But having said that, I don't really think that this is going to come to fruition anytime soon. I mean, it would be an enormous undertaking. And, you know, you couldn't start that process. But it would be a really long term, pretty substantial project to undertake large structural problem project. But I think it does kind of introduce some arguments and interesting conversations that should be happening about what is the role for credit files across people's lives? Yeah, impacts our credit files and high credit scores having on people beyond just being approved or declined for a loan, and maybe what could be existing entities do to ameliorate some of the kind of negative consequences? Because there are all kinds of positive impacts to having credit. But if, to the extent there are negative consequences, what can be done to reform those without having to completely go to a public CRA? Rick Morgan Yeah, it'll be interesting. I mean, you know, the best case scenario for the Biden administration right now would be to own a very, very slim majority in the Senate. So I think not having that margin, I guess, in the Senate is gonna make it tough to to accomplish something like that, for at least what I've heard from, from people that I've spoken to about that, given that the Senate is coming down to two runoff races in Georgia, and it's, you know, it's gonna be it's gonna be tight, regardless of what happens. Where you were going there at the end, I kind of want to change gears and talk a little bit about the technology that's behind this. I mean, are there any particular technologies that are vital in this mission of reaching underbanked consumers? Does anything stand out? Leslie Parrish Yeah, it was kind of thinking to this question, I think there were two real will two of the needs that really stood out to me, for people that are underserved right now. And it's not just low income people it could be people with, with the lack of credit score, or have a thin file, or it could be with low credit scores, and people's low credit scores run the whole gamut of, you know, up the up and down the income scale, I would say, um, you know, to the extent that you could deliver financial products and services, as real time as possible. That is something that can really help currently underserved consumers, as well as opening up as many forms or channels of communication and ways to engage as possible. So especially on things like mobile and taxes. So I think now, one example of this, we have a lot of challenger banks that have been cropping up. Yeah, for sure. So that are offering quicker access to direct deposits. So you know, maybe instead of having to wait a day or longer to get access to a check, getting it even a day before it really actually hits your account, because they can see that that money's coming in from your employer. The rest of them are very small. But to get that pay, you know, maybe a day in advance can make a huge difference to someone that's underserved in terms of channel kind of opening up channels, so that you know, someone can do all their banking or engaged through a mobile app or, or texting or a self service portal where they don't have to, you know, engage with their bank. between nine and five that can then do it at a time that works for them, any kind of way to engage that way I think can really help the underserved. And the non traditional financial services industry has been doing these kinds of things for years, you know, auto, quick bill pay, keeping their stores open nights and on weekends, this is just kind of taking that into, you know, 2020 or first century in terms of, you know, technology delivering those kinds of things. Rick Morgan Are those technologies changing over time? Leslie Parrish Yeah, I think slowly. Financial institutions are a little bit hamstrung by, you know, compliance considerations. And regulations never keep up with technological advances. We've been testing in our personal lives for a very long time. But until recently, it's been pretty scary for a financial institution to think about texting their customer. And, of course, even I mean, with that collection, it's, it's still a scary thing, that they're still kind of, there's a little bit more certainty there now, but just takes a while to get comfortable with him new kinds of technology and making sure that your regulators are going to be on board with that. I do think as some regulatory certainty is coming into play, I think more communication channels are opening up. And institutions are able to kind of meet consumers where they want to be met, how they want to engage. I think another area where this is moving forward is consumer permission, account transaction data. So this is an area where I think, you know, can really help lenders understand, if consumers are good credit risks, even if they don't, maybe they don't appear to be so with traditional credit files. But lenders were a little bit scared to use that until federal financial regulators came together and issued a statement, basically giving it the green light about a year ago, that gives lenders you know, far greater comfort and clarity on being able to use that as a source of credit underwriting for credit underwriting. Rick Morgan Yeah, the transactional data to sort of underwrite consumers, and reach beyond the traditional credit bureaus is an interesting one. It's one of the many pieces of alternative data that a lot of fintechs are using to reach underbanked consumers. Why is it challenging for incumbents to use this data? What are some of the challenges that they're overcoming to make this happen? Leslie Parrish Sometimes it's really difficult, even if you know that it's a very promising thing that you could be doing in your business, it could be hard to make the case, why what you're currently doing isn't necessarily a long term strategy, or it won't work as well in the future. So for a lot of incumbents, you know, business is really good, as usual, until suddenly, it's not, and then they share and then they're kind of struggling to keep up. So anyway, one example I'm thinking of there is Rocket Mortgage. So you know, they kicked off with a great ad campaign, I don't even remember what year but during the Superbowl, and they had this online, relatively easy process to apply for a mortgage. And then suddenly, things are trying to catch up and institute their own very smooth, slick way to apply for a loan. But in the meantime, they lost a ton of market share to Rocket Mortgage, and they're only kind of slowly building that back up now. So it's really hard to have that thought of doing something different. As a large financial institution, that's always kind of done something a different way until you're I think another way, another thing, another struggle is just the regulatory risk involved, not having that clarity. And I don't think there was a lot of clarity around alternative data and what was kind of in and out of bounds specifically until pretty recently. Rick Morgan So in the UK, Experian is now allowing consumers to incorporate Netflix subscriptions into their credit profile, which could you know, in turn boost credit scores. And during a recent conference, I watched with Brian Brooks, the acting comptroller of the OCC, he was talking with Berkeley Research Group, and he was talking about how payments that we all already make, like rent and he used Netflix specifically, is a way that we could sort of start to reach thin file consumers and help them build credit. Is that something you see ever working its way across the Atlantic to the US and becoming a way that we underwrite consumers? Not necessarily Netflix, but I'm just using that as a jumping off point. Leslie Parrish Yeah, absolutely. I think as long as the data source we're using, really specifically measures and individually shows ability and willingness to pay a financial obligation. Things like Netflix, I think are a perfect example. Because, you know, before you know, the types of bills people are paying really evolves over time. Yeah. Or maybe you're paying a landline for landline and cable, and now you're paying for, you know, broadband, high speed internet, you're paying for streaming services, and you're paying your cell phone bill. But whatever it is, I think as long as it's really measuring you as an individual, and how you're meeting your obligations, it could be a great source of seeing, you know, what your potential is to repay a loan. I think Experian Boost credit score is a great example of how this happening in the US where people can proactively go into Experian, you know, say, I want you to record my positive payment history on Bill A, Bill B, and Bill C, and B creates a trade line within their traditional credit file that can impact their credit score. And so, you know, you could think of right now it's maybe your credit card payment and your water bill, Why couldn't it be Netflix or something else? It's a recurring bill payment. So absolutely, I think that has great potential, it's in that category and not something like, you know, your social media usage or, or maybe even like the school you went to speak to how you're managing your financial obligations directly. Rick Morgan Yeah, I mean, it actually sounds like it's kind of already starting to happen, especially through Experian Boost is a good example of that. In terms of incorporating more data, to promote financial inclusion, we've talked about how in comments and sort of getting over these hurdles, but are they partnering with fintechs? Is that part of their strategy? And if not, should it be? Leslie Parrish Yeah, I think we're where they haven't partnered with fintechs. Yet, it's definitely a great avenue for getting up to speed really fast. And this. In a lot of cases, there are fintechs that have created their own lending platforms, to originate their own loans. And they've done a great job of, you know, attracting consumers, creating really interesting and novel underwriting models, servicing those loans and collecting on those loans. And then they've spun out that lending platform and allow banks to use it as well. And so I'm thinking of, for example, Avant, is an online lender that spun off a company amount that's using that lending technology that that, under that, you know, is about loans and underwriting avant loans. And they're letting banks use that technology, that's that they've tested and proven over the years. And for banks, it's great because they can quickly spin up a lending business. It's not, you know, they're not using it across their bank for all of their consumer lending businesses, but maybe they want to introduce a new personal loan. And maybe they want people that are outside of their, you know, outside of their existing banking relationships, and serve them, it's a perfect way to quickly spin up something that already has a pretty established track record. The other way I see some banks partnering with fintechs, is to really use the data that they already have in house much more effectively. So at a lot of banks, it's not that they need more data, it's just that they have all these pockets of data in so many places, and they're not using it for anything, or they're not using it very effectively or bringing it together in an organized way to really operationalize it and, and use it in a meaningful way. So there's been Tex criterion, which is acquired by Mastercard, but has been its own company, you know, we'll help a financial institution, figure out okay, here's all our pockets of data, how do we actually use AI to get together in a meaningful way to more accurately look at credit risk? So the banks know what that data is that they don't know how to use it criterion doesn't know their business, but they know how to use the data. So they come together and kind of help each other to ultimately create a better credit risk model through AI. So there's a lot of different ways to partner. Rick Morgan Yeah, fantastic. So in terms of these direct to consumer startups that use alternative data to create better lending products you mentioned Avant, there's also others Upgrade or LendUp. There's small business lenders that are doing this BlueVine and Kabbage which was bought by Amex. Obviously one avenue is to as you mentioned, avantage, which is spin out the technology to have a separate arm that sort of white labels is the banks. Are there any other sort of future business lines you see? Or like, I guess, what do you see? Is the future for these direct to consumer startups? Do you think they'll stay direct to consumer? Or do you think more than we'll go down the path of avant? What are you kind of predicting? Leslie Parrish I think they are looking at the success of bonds and others and transitioning that over. And as long as they're, they don't feel like it's going to eat into their own customer base, which cases it can absolutely be complimentary. I don't see any reason why they wouldn't explore that option, especially. Because I think they are a little bit vulnerable right now with the economic downturn. I mean, these are newer companies. So they haven't really had to deal with an economic downturn of this magnitude. But they're kind of stress testing their own data models right now, where, you know, alternative data wasn't used in the last downturn. To the extent it is right now. ways we're using data that techniques for loan decisioning weren't used last time around. And of course, this is a very different downturn than we've had before, that people are thinking might happen. So it does seem like a time that you would potentially want to branch out and see what other types of you know, ways you could do business? I think one key I have to is, you know, if, if there is less demand for consumer credit, for a sustained amount of time, banks can survive, because they have a broad array of offerings, they have bank accounts and things but if you just are doing, for example, online, unsecured personal loans, that could be a pretty big challenge to you know, maintain the integrity of your portfolio, not too many people. That may be too risky. But still, you know, maintain your business. So, branching out and looking at other ways you could, you know, generate revenue seems like a natural next step. Rick Morgan The thing I wanted to end on is sort of a forward looking question, what's one technology trend that you're keeping an eye on in the next six months? When hopefully, we'll speak again? Leslie Parrish Yeah, so one thing I haven't seen a little bit of now, and I really hope will happen, push financial inclusion, is a move to kind of better align incentives, underlying incentives between lenders and their customer bases to kind of create more Win Win opportunities where lenders will generate more revenue for themselves when become more financially secure. So I think when you kind of think about traditional consumer credit products and other kinds of banking products, you know, they were kind of structured where lenders could potentially generate more revenue, when a borrower does something that's maybe not in their best interest. So if they make the minimum payments on their credit card every month, or if they accidentally pay late and incur a late fee, or if they overdraw their bank account, and generate that fee income. And so in a lot of cases, the lender and borrower weren't in line, they're in terms of what was best for one may not be best for the other. But more recently, I've seen some products come into the market that are really interesting that align both sides. SoFi just announced that for their credit card holders, they are going to give 2% rewards or cash back. If the consumer designates that cashback to go towards paying off another SoFi loan or investing in a savings or kind of investment product. That would be one example. In the underbanked space, there are these mobile apps where you pay a flat fee every month for kind of budgeting tools and advance if you overdraw your account, well the fewer times you overdraw. Really the more revenue and less risk there is to the FinTech. Virgin is one example of this. So really kind of Alliance so the better you know you're doing a budget in the last year overdrawing. You're still paying that fee per month, but providers being able to retain more of that with less risk. So I'm really hoping that there are more and more products like this that are taking a look at where the incentives are to build both financial stability for the borrower, and revenue for the lender. Rick Morgan Fantastic. Well, Leslie, that's all my questions for you today. Thank you so much for joining us. We really appreciate it. Leslie Parrish Absolutely. Thanks for having me. Rick Morgan Thanks to everyone for watching. We will see you next time. [/toggle]

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