Open Banking and Lending: It’s a Match!
How Consumer Credit and AI are the maids of honour of a marriage blessed by heaven and celebrated by faire.ai
Building up a financial service on top of open banking foundations, it’s something far way more noteworthy than a simple pitch shift from an operational process. It’s the disruption of a paradigm from a conservative past and a configuration that hasn’t been yet fully recognized by financial authorities. Being a hybrid system built on top of financial aggregation and being a financial agent, as a sole credit intermediary, triggers critical points that are disruptive as much as introducing a blockchain in an established business process.
Blockchains are a new paradigm of decentralization of data and open banking is a new paradigm for the ownership of data.
Give me some credit, please.
Which is the key factor that made such a marriage possible? In 2018, a new opportunity called Open Banking: with such a technological trend, the ownership of the transactional data, literally the card transaction and bank settlement for paying your daily morning cappuccino, is taken back to the hands of the customers. Until that moment, the solely responsible actor with the ownership and the granted data access was the bank owning the account. The situation has dramatically changed with the consequence that now any bank customers can deliberately grant their own account data to any third-party services, specialized on additional — and hopefully far way better — financial products that might even not be provided by the original bank. Consumer credit is just one of the added value financial services that can be built on top of open banking transactions.
Let’s take a snapshot of the current situation. Consumer lending is a pretty powerful financial instrument that does have a massive impact on people’s life. A massive impact that can change a person’s life for good. At the same time, conservative lending so far has been one of the most flawed processes, both from banks and customers perspective, that brought it to be one of the most feared beasts in the bank products’ zoo.
- The onboarding of the user is a tedious process due to offline processes, including the collection and physical submission of paperwork, as well as often requiring a physical presence in the branch.
- Waiting times are long to get approval from the bank, due to manual review processes, ranging from 5 to 10 days. The bank itself bears the offline processes’ burden from collecting and sending physical documents: manual activities such as data entry take time and errors. The operation is then prolonged and cumbersome, with requests for bureaucratic documents (such as payslips and signing of documents) to be done in person at bank branches or through the post offices (!).
- Moreover, Conservative and non-inclusive risk models are based on socio-demographic inputs whenever data for credit bureaus is missing. That leads to a very unfair credit risk model and, therefore, limiting the possibility to disbourse credit to customers that can get and handle loans. Socio-Demographic data does not matter!
- Yeah, if you get an unfair risk score, just based on your socio-demo background, credit can be pretty expensive too.
So fare so long, we’ve decided to take care of such pain points building up a new innovative startup in Europe called faire.ai. Faire.ai is a fintech credit specialized in consumer credit automation that leverages Open Banking (PSD2) as data source and AI for credit risk, in order to offer consumer lending as an added-value financial service. Our vision is to create credit analytics services based on artificial intelligence and machine learning and enable traditional banks to integrate consumer credit through a single API offered on a cloud platform.
In order to solve the point 1 and 2 and make the things even more interesting, we’ve decided to architect a system that executes the evaluation and the disbursement of a credit instantaneously to any customer requesting a loan through our application and platform, reducing the 5/10 days normally required for disbursement to just a few seconds. This is a technologically groundbreaking challenge and a unique product on the European scene that connects banks and technology platforms, directly exploiting the open banking directive’s opportunity.
Hang on, that’s cool so far (eh) but 1. how are you going to provide the instant feature?
We talk directly with the core banking systems of our partner’s bank. At a deeper technical level, we have crafted our own connector, a software module (a microservice for the geekys) that we directly deploy within the banking platform virtual private cloud, that communicate straight with the bank’s core banking system. With such a solution, we can operate automatically at bank level, approving credit and making an instant disbursement to the customer to the bank account that has been aggregated.
Hang on, that’s cool so far (eh) but 2. how is the bank going to trust your credit eligibility process?
The solution to such a problem is essentially at the heart of faire.ai’s value proposition. The rules we use for due diligence and credit eligibility have been decided and approved ahead of time together with the bank. We outsource and automatically execute the credit assessment and approval process on the bank’s behalf.
Hang on, that’s cool so far (eh) but 3. how are you going to simplify the processes?
Within faire’s platform, every process that belong to the domain of debt such as onboarding, creditworthiness assessment, credit application, signing of the contract through a digital signature, and disbursement itself, are shaped to take place through our cloud platform and our mobile app. Faire.ai is moving in the direction of democratising application processes by simplifying and digitalising all procedures, and in particular by making credit approval and disbursement instantaneous, which is pretty unique, especially here in Italy.
Precisely, faire.ai is a cloud company that acts as an agent in financial activity and a “one-man credit intermediary”, externalizing the consumer credit management and enabling the banks to enter the retail credit market. So through open banking, we enable the partner bank to provide credit to customers of other bank competitors. A pretty advantageous position for our actual banking partners who can extend their market towards the retail segment having the processes totally automated, not requireing the physical intervention of any person.
Ok then, Let’s talk about AI
So the plan to take over the world is to disrupt conservative risk models and replace any human-based like operation with Artificial Intelligence. What does it mean Artificial Intelligence? There’s a pretty huge misconception about the meaning of AI: journalists generally give to AI a definition (often catastrophic) that does not meet the expectations of data scientists.
The impact of Artificial Intelligence must be idealised as a factor that is leveraging the human possibilities: we can do extremely fast operations with AI that emulate human intervention. Replicating human behaviour becomes the guideline for the creation and the crafting of a technology. Classic creditworthiness trusts in a limited number of consumers’ characteristics as AI opens to evaluation on large datasets that individuals cannot reason on.
Ok, so let’s shed some light and reveal some industrial secrets (oops)
As illustrated in the diagram above, through a local open banking gateway we obtain the open banking data, that the customer allows us to read, in a secure manner. The data is processed then through different layers:
- the first level of analysis is performed by a supervised learning module that categorizes transactions towards our internal and proprietary category model.
- The next step is to exploit these “enriched” transactions to run several ML forecasting models to analyze future customer behaviour and spending power.
- We extract more than 50 key performance indicators (KPIs) that give us an obvious “snapshot” of the customer’s economic situation from these layers. With a certain threshold of probability, how will it be in short to medium future terms?
- From all this, we derive a synthesis model that we call the Risk Score. All these parameters are then passed on to the connector, which runs a risk model that executes a model of rules, decided ahead of time with the bank, which automatically assesses case by case the credit eligibility.
Current bank risk models analyze data from credit histories that come from risk centres. Our point of innovation is that credit assessment is closely linked to the user’s transactional data, collected and analyzed in real-time from current accounts using open banking. Given the size of the dataset for each user, Artificial Intelligence has the ability to extract value from this mass of data that would otherwise be “incomprehensible” to any human being.
Thanks to this alternative data source, we overcome traditional models where the lack of a payslip or a credit history makes people unbankable or assessed according to a socio-demographic categorization, creating a bias, as it is not related to the real data of the people.
Thanks to new KPIs and the analysis of associated data, we create a timely and sustainable score for segments usually excluded from credit: young workers, part-time students, or simply freelance workers. Each worker is internally assigned a profile and a credit line, regardless of where you came from and who you are, and the disbursement is instantaneous as it is executed through our software connector.
At the very end of the line, the partner bank executes the lending: the customer itself belongs to the bank as matter of fact that we are a cloud financial intermediary. We have a revenue-sharing model with any bank partner and therefore we get a percentage on the interest of the loan disbursed. It is a very profitable model and very “faire” as we earn in correlation if the bank or financial institution is able to disburse the loans to the people. The competitive advantage we give to the partner bank is that we scale up the disbursement volumes, so we can also offer to customers lower and competitive rates than the market.
The target audience we have so far analysed is such segment of the population that has no generally difficulties in managing its own finances through new technologies (I would say the 18–50 age range). Generally young people or professionals, or anyone familiar with the technology. Therefore, our flagship mobile product, that will see the light in September 2021, CREAM, aims to allow the customer to get a credit refinancing existing transactions. Such functionality makes it possible to create new life opportunities for people who can recover liquidity from expenses that cannot normally be refinanced.
The credit itself is a financial instrument that can contribute to change the life of a person, opening possibilities that would not be possible in normal conditions. At the same time credit if used badly can lead to a frustrating life situation (the famous downward spiral of debt). That’s why education and bare-to-simple access on how to use a certain financial instrument is a mandatory requirement, and that’s the role of Fintech: to Democratize the access of financial instruments and leverage the quality of life of people.
TL: DR; Essentially we will democratize the access to the instant lending. Easy-peasy lemon-squeezy.
Risk Central and Credit Bureaus have not inclusive and unfair risk score model that do not follow the modern trends of society. Faire.ai is advancing in the direction of democratizing the application processes, simplifying and digitizing all procedures and in particular realizing the benefit of making the approval and disbursement of credit instantaneous, a unique case in Italy.
And the journey so far…
It has been so far an upward-spiral rollercoaster of emotions. A fintech startup like Faire.ai is an entity built upon a constellation of independent and complementary components, very different in nature and, at the same time, high coupled to each other: tech, product, compliance, marketing, business, analysis, design, communication. Some of these layers, especially tech and compliance, have to deal with existing inflexible, conservative and legacy infrastructures. Such topics can be pretty challenging, in a world where there is very little space for errors as we are dealing with a very emotional subject: money.
Everything started with the goal to provide a financial instrument on the market simply leveraging a new opportunity that is still unexplored: the open banking. Actually, our value proposition and product is divided into offering a credit score as a service, a cloud platform for enabling instant lending and a whitelabel solution. It has been so fast that this year we are already going outside the Italian market and exploring Europe.
A creamy cake of Fintech for the Future.
I would like to stress a global fact: in the last 20 years, the global Gross domestic product is increased significantly. Globally now the economy is three times greater than the 2000 and especially it is much more integrated and interconnected, thanks to technology and Fintechs. As an advantage, the increased GDP took out of poverty from about 1 billion people in the world, but still, the fintech product must be significantly simplified to make it accessible to people. The modern society nowadays has very little know-how about financial instruments and educational institutions do not grant any, or very little, financial education. Even more, media on a regular basis are giving psychological terrifying news about seldom stock market crashes and people that get somehow scammed by banks or by any Ponzi’s schemas. It’s easy to get pretty uncomfortable by financial subject that are always introduced as complex to understand and difficult to manage. Nonetheless, money is a very sensitive subject that leads to emotional impact, where there is pretty little space for errors. So people do actually lose the possibility to leverage their lives with very powerful financial instruments such as credit, investment, insurance, savings account, payments, pfms, etc that can give a significant contribution and be a life-changer.
That’s exactly the role of Fintech and the mission of faire.ai. To Democratize the access to financial instruments and leverage the quality of life. Any financial instrument has strengths and weaknesses, therefore whenever there is the simple access to them and a clear understanding of how do they work, then they can be beneficial. The role of Fintech is therefore to educate people to understand the pro and cons of every financial instrument and lead the customer to use them in order to have a positive impact on their life.
We are looking at Europe and all the countries that are implementing the open banking directive in order to offer the most innovative risk scoring and a the most advanced lending service, and have a significant impact in people’s life… therefore feel free to drop us a message, wherever you are!