The Myopia of the Personal Lending IndustryBy Adrián Fernandez de Mendoza | Mon, 12/14/2020 - 09:00
I cannot claim that I’m an expert on personal lending. I’ve been in this industry for almost five years and I’ve been reminded several times (and in some cases very loudly) that the intricacies of the risk models, customer profiling and collections strategies make the possible outcomes a small universe that it is practically impossible to master.
As we have achieved a couple of big milestones for our business, 120,000 credit lines granted for over MX$1 billion, I’m try to keep my eyes fresh to continue understanding the challenges and the opportunities in the unsecured lending arena. As business people, we usually tend to grab the microphone to celebrate our achievements and to shout our unique value propositions to a confused customer base that it is overwhelmed with Google and Facebook ads, radio interviews and TV commercials during their favorite nightly news show.
I cannot definitively speak for the whole industry and my badge as a five-year veteran might not be strong enough for some of the 30- and 40-year financial and credit experts in Mexico. But one thing I can do is to be humble enough to recognize when we fail and to dream about the solutions, avoiding the myopia of the big opportunities in front of us and the needs of a market hungry for a good, fast and competitive product that meets their daily needs.
Consider this as a mea culpa, and a pledge to continue challenging ourselves until we get it right. Here I go:
Mixed incomes: Financial institutions love employees with bi-weekly income flow that reduces the uncertainty and makes the credit team sleep peacefully at night. Even more, in Mexico, we have a huge payroll lending industry where the companies withhold the payments with almost 100 percent repayments.
But Mexico is different. There is a significant population that, requiring a bigger family income, have a secondary income, selling through catalogs or even having a small family business. We usually do not consider that income formally since we consider it variable and not sustainable. What can be more sustainable than to need that income? We definitely need to evolve and view the income profile more holistically.
Gig economy: The incursion in Mexico of ride-sharing platforms, groceries or food delivery apps and more has jump-started what it is called the “gig economy,” a part-time job that completes the expected personal income that for unemployed people became the tool for the breadwinner to make a living for her/himself and her/his family.
Unofficial numbers suggest up to 2 million people in Mexico are working full or part-time with these platforms. This is where the challenge starts: most of them do not have bank accounts or a credit history. How do you make a proper assessment to provide them with fair, quality financial products? “They are high risk since their jobs are volatile,” credit execs could say. Wrong. I believe they are hidden gems for the financial system who are fully committed to their incomes. I’ve starting to see some fintech companies, especially neobanks, looking to provide basic financial services, but there’s still long way to go.
Thin files, no credit history (students): This might be an urban legend but I heard a few years back that one of the multinational banks that operate in Mexico had a credit rule that it would never be the first institution to provide a credit card to an individual. “We want other institutions to run the risk before us.” Sounds pretty credible to me.
There are around 5 million college students in Mexico and if you add up the “thin files” (people with slim credit history records), the number could hover around 10 million. The stubbornness of assessing people with no credit history with credit history tools seems just dumb.
Now there seems to be a new wave of ideas and tools to predict the payment performance of those individuals: psychometric assessments and mobile scraping apps, among others, are starting to be used in testing to try to crack this interesting market. Would you let an app read sections of your smartphone in order to find clues to assess you and give you a credit product? “No way!” some will answer. But those same people have agreed to let other apps read that information already, with no clear benefit for the user. Something to think about.
Changing gears, I would like to state how extremely proud I am of what we have accomplished in Mexico and the invaluable contribution of all my colleagues in Creditea. It might sound like a cliché, but every week we look to slightly improve our processes, products and interaction with our customers, who are truly the reason we are here. We might never get it perfect but I am sure that if we continue listening, reflecting and acting vigorously, we will get closer and closer to that perfection.
But hey, we have just lent 1,000,000,000 pesos in Mexico. Still a lot to learn and evolve.