Lenders, fintechs and neobanks are in a ‘tech arms race’ on turnaround times, with their ability to combine speed with regulatory compliance and risk management, according to a leading data insights company.
Experian’s Risk Radar report laid bare the bind that many lenders are in, with pressures from brokers and their customers, the government and regulators and their own financial risk causing headaches.
The report found that two-thirds of lenders have turned away borrowers due to a lack of data, with many scrambling to update their loan approval systems to be better informed and make better decisions.
The changing goalposts of compliance has led to many taking a risk-averse approach, with 78% of those surveyed saying that it was their major concern.
The government’s quiet shelving of Responsible Lending Obligations (RLOs) cited as an example of how quickly they are forced to adapt: back in March, the Senate was discussing removing key aspects of RLOs to allow banks to lend more freely, only for more recently, APRA to tighten lending conditions.
“We spoke to senior credit and risk leaders in Australia, from both large banks and fintechs, and that’s given us some really in depth insights,” said Mat Demetriou, general manager of decision analytics for Australia and New Zealand at Experian.
“The key finding is that lenders are taking a more cautious approach when it comes to credit risk and approving loans, which probably explains why customers are not getting approved and are potentially going elsewhere because of the long lead times to get an outcome.”
“That’s partly due to managing risk in an ever-changing, complex regulatory environment, and partly – especially for incumbents – because they don’t have the systems to be able to leverage all the data points available to them to make the most accurate and informed decisions.”
“When you combine those two things together, it certainly makes things more challenging for lenders.”
Those with large legacy systems, in particular the Big Four, have struggled to adapt to this climate of change and are investing massively in tech to bring them up to speed.
“Open Banking has huge potential,” said Demetriou. “It’s still at a fairly embryonic stage I’d say, but it will change the game. That said, you still need to invest in tech to be able to get access to these data points that banks don’t have access to today.”
“We are seeing huge investment across all of our clients in tech, data, automation and AI as a way to get access to more comprehensive data points to make more better credit decisions.”
“There’s three dimensions to this. On one hand, the regulatory landscape is so complex and appears to be constantly changing.”
“Earlier in the year the government suggested winding back some of the more onerous lending conditions that had been introduced on the back of the Hayne royal commission as a way to restimulate the economy, but more recently, the RBA has come out and called for tighter lending conditions to cool the hot property market.”
“Lenders find themselves caught between a rock and a hard place. Of course, they want to help borrowers to achieve their financial goals through access to credit, but they also need to ensure that they can manage risk for themselves and for the customer, because it’s in nobody’s interest for customers fall into hardship and risk defaulting on a loan that perhaps they weren’t suitable for in the first place.”
“The third aspect is that lenders need to remain competitive. Competition is so hot in the lending market at the moment and we’ve spoken widely about the emergence of fintechs and neobanks. They’re all competing for a share of the pie, and there’s a tech arms race going on.”
“There’s significant investment in tech in an attempt to offer fast loan approvals and the best customer experience, but of course, that speed needs to be balanced with accuracy and compliance. It’s a really tricky situation.”
