Bobsguide spoke to Thomas C. Brown, Senior Vice President, U.S. Commercial Markets and Global Market Development, LexisNexis Risk Solutions, to discuss the issue of financial inclusion for businesses and consumers, and how better data processing can assist assessing risk, opening a new market up for financial services firms
In 2017 why is there still an issue of financial inclusion, especially in the developed world?
Many of the greatest issues, such as access to credit, terrorism financing and corruption, that are affecting the world are related in one way or another to a lack of inclusion or a lack of transparency; and these same issues are at the heart of the financial inclusion and financial transparency problem; whether that is trying to achieve sustained growth in a given economy or trying to protect the financial system against bad actors.
One of the most developed economies in the world is the US and still to this day up to 25% of US consumers are considered unbanked or underbanked from a credit perspective, and similarly up to 60% of small businesses are unbanked or underbanked.
When you look at developing economies, those percentages are greater. In Brazil there are approximately 200 million people and up to half of them are excluded from traditional financial services and flexibility, for example.
That’s just speaking to credit unbanked. When you think about this concept of economic inclusion, which is broader than financial inclusion, you have to consider all types of services. You have to consider access to payments services, to insurance, access to deposit and transaction accounts.
Any way you measure it financial inclusion and financial transparency still remain very significant issues for every economy regardless of where it is its development lifecycle.
Does it surprise you that 60% of small enterprises in the US are underbanked?
It’s interesting because so much of any economy, but particularly the US economy, is driven by small businesses. We’re hearing from our customers more and more that financial inclusion needs to focus on small businesses, and that is reflected in the regulatory environment in the US, but it is a relatively recent development.
Often people only think about consumers when it comes to financial inclusion, but it is the small businesses that can be the most challenged in terms of accessing the financial system. That reality can really impact economic growth because it is the small businesses that hire.
As a company what we do so well is utilise our technology from a big data standpoint and from an analytic linking standpoint, to bring all the data together to a particular entity. This ability allows us to fill in the white space, the gaps a customer might have and therefore enables us to provide a robust risk assessment for our customers.
From a fintech standpoint, often they are targeting innovative customers that sometimes fall into the area of the unbanked because they are doing untraditional things.
By supplying a vast repository of data combined with our technology and analytic linking, we’re supporting fintechs as they reach out to the underbanked population; and we’ve done so for decades. We pioneered the concept of alternative credit risk assessment, and we’re doing the same thing now for small businesses.
What is the LexisNexis Risk Solutions’ role in solving the financial inclusion problem? Does solving the problem simply come down to processing more data?
It comes down to three things, including processing more data from diverse structured and unstructured sources. Being able to bring that data together accurately is also important; our business is highly regulated so we have to use the most sophisticated techniques to bring the data to the right entity.
And then linking those entities to one another is vital. Often relationships are critical in risk assessment; how different consumers relate to each other and certainly how businesses and consumers relate to one another is important information when trying to determine credit worthiness or whether a financial crime, like money laundering, could take place.
If you look at the broader risk industry in the US, credit reporting has been in place for 100 years or more, but the banks have always relied on the same data from the main credit reporting agencies.
We evolved out of our legal business 20 years ago when we started to amass data so that parties to a legal matter could conduct background investigations around the parties that were engaged.
For that we had to create an ability to curate all types of different data; for example, just from a public records standpoint we have over 500 individuals that collect data from different courthouses and other government locations around the US for us. All that data has to come together in a meaningful way for it to be useful. And that’s just one source, we can bring literally thousands of other sources together.
Now we’re able to take this capability and deploy it in new industries within the US as well as new geographies around the world. And that’s truly what differentiates us, our ability to create new ecosystems where we can bring together an industry to solve unique problems, create new insights, and ultimately fill in those blind spots that allow for greater inclusion and transparency.
Would you say that providing credit to the unbanked is a method of stimulating an economy?
Absolutely. Consumers and businesses are the backbone of sustained growth in an economy and allowing those participants flexibility with a broad array of financial services contributes to economic growth.
A common thought a decade ago was that if someone didn’t have a credit history or sufficient profile in a traditional sense that meant they were risky. That’s just not true. Individuals exist in that population who are acceptable credit risks to our end customers, like a lender, and those who are not. You have individuals who are going to perpetrate fraud and those who are not. The lack of credit information is just that, it doesn’t have any bearing on whether an individual is risky or can be an active participant in the economy.
Using data, technology and analytic linking to determine the good consumer and small business credit risks absolutely fuels growth. For me, one of the exciting stories over the next ten years is going to occur in areas like China and even Brazil, if these countries are effectively able to transition to a consumer-based economy from an export-based economy. Arguably there could be upwards of 250 million people that are underbanked in China. That’s more than the adult population in the US. When you think about the type of fuel that could be brought into driving growth there, it’s pretty remarkable. And in some cases in China they are being more progressive about the use of alternative data than the US, even though we’ve been using it for decades.
A consumer-centric economy is the most stable for achieving long-term growth. Bringing more and more people into the financial system, the economic system, is one of the most direct ways to fuel that growth. So I think that’s a critical dynamic.
Often there’s a reaction that privacy issues or consumer protection are at odds with this concept of inclusion but it’s the exact opposite. The more that we can bring the right data for the entire population, the more credit can be extended to the right people because the tools are in place for banks and other creditors to respond to and then extend credit.
Would you say collaboration is the way for fintechs and banks? How can they work together to reach the unbanked?
Some fintechs are so focused on their business model and moving so quickly to change the world that they lose sight of some of the basic risk management practices.
We have customers that are progressive in terms of their innovation and are also mindful of proper risk management practices. Other fintechs ignore those issues and only focus on them when they are under scrutiny. That scrutiny could come from a violation that might be pointed out by a regulatory agency or a government, for example lending money or engaging with someone that’s a banned entity on a government watch list, to experiencing a significant fraud problem where they experience uncontrollable losses.
The advantage of collaboration within fintech would be to pool expertise and develop standards that allow protection across a greater set of end users, and certainly by collaborating with banks. One of the things that banks are good at is their ability to mitigate risk.
We spend a lot of time working in a unique way with different types of technology and fintech companies and it never ceases to amaze me the new ways in which our capabilities are deployed to protect our customers. But certainly that collaboration can help, whether it’s a group of fintechs working together or something broader.
How do fintechs uncover new opportunities and do so with acceptable risk powers?
That’s actually something were doing more and more of in that space. In terms of our credit risk assessment business we’ve encouraged a lot of our customers to do pre-screen activity so that they can make qualified offers of credit to the underbanked.
Taking that to the next level, this allows them to better select prospects and really identify targets from the underbanked. This is effectively offering traditional services for the underbanked and it really extends banking capabilities to that 25% of the US that is not well represented by one of the three national US credit reporting agencies.
And that really is a way for all types of firms, but fintechs in particular, to have a competitive advantage because a lot of these consumers can be a very acceptable credit risk and they can be marketed to for less, but for some reason they are off the grid. We are able to bring together that content for their assessment so they can actually be more profitable than comparable risk profile bank consumers. That actually creates quite a nice opportunity for our customers.
What are your predictions of this year’s major industry trends?
I think that there’s certainly a significant focus on anti-corruption. I was in Brazil earlier in the year and the corruption scandals are all you read about in the papers. Everyone is looking for ways to drive corruption out: The issue is very acute in Brazil but that dynamic exists everywhere.
Even in the US we hear about it at all levels. So I think that’s a trend that has to be taken seriously by every type of firm and is certainly a critical trend.
Another trend that will take more time to develop is the appetite for industry participants to come together to solve these problems through the creation of consortia, which are also called utilities.