Responsible lending practices are back in the headlines, and once again Australia’s major banks are under fire.
In statements to ASIC, all major banks inferred that using transaction data to access loans is an expensive and risky exercise.
What wasn’t reported, however, is that all major banks are leveraging partnerships with fintechs to quickly build out this capability.
Behind the headline, this is yet another story of bank and fintech partnerships working towards better outcomes for society.
Basiq and Look Who’s Charging, for instance, are two companies in this space, helping our banks better understand their data — and make better decisions with loans. Both are in discussions with our major banks.
“Banks currently ask customers (applying for a loan) to simply ‘guess’ how much they spend per category, and will then use these guesses to compare it to Household Expenditure Measure (HEM) which is a national index,” Lorraine Longhurst from Basiq says, explaining how the system currently works.
“The reality, however, is that customers are not incentivised to provide a true indicator of their expenditure — as they’re trying to get a loan.”
“Applying someones guess to a general index further increases the risks, because the reality is that an individual living in lower economic areas do not have the same lifestyle or spend as someone that lives in a higher economic area.”
Longhurst says it’s in banks’ interest to build out more sophisticated and automated transaction data analysis. If this process is undertaken, it’s usually done manually, with bank employees going through the transaction data line by line.
The infrastructure to do this already exists, she adds, with all electronic payments from a person’s bank automatically falling into an existing and extensive merchant classification system.
Simon Keast, Managing Director of Spotcap, a business lender, agrees.
“This secure approach to accessing data that facilitates an assessment takes just seconds, not hours, or days. It is a safe and secure way to assess a borrower’s ability to manage debt, and one of the strongest sources of predictive data,” he says.
“Ultimately, we believe business owners are at greater risk by taking on debt they can’t afford than they are embracing new technology which allows them to access the finance they need quickly, easily and at a fair price.”
Other fintechs, such as MoneyBrilliant have built out their own systems to inform consumers of their spending habits and help improve financial literacy.
Peter Lalor from MoneyBrilliant adds: “If banks are unable to accurately categorise customer transactions we and many other fintech businesses would be willing to help by selling them services to do this.
“We’ve been doing it for years!”