A recent study by the Financial Conduct Authority (FCA) found that banks were turning away or closing the accounts of customers deemed to be high risk, which includes foreign nationals and students. It reported that two large British banks are closing around 1,000 personal accounts a month to curb these risks. However, the FCA has warned that banks could fall foul of competition law if they refuse new business or close accounts without good reason.
But at Hello Soda, we believe that banks could be turning customers away unnecessarily because their practices are antiquated and not giving them reliable, accurate risk assessments. Traditional data sources, such as credit checks, are not sufficient for modern banking. There has been a significant rise in the number of thin credit files – that is, consumers without a credit footprint. Traditional credit scoring methods rate the lack of a consumer’s credit history as high risk – even though they may be more responsible and reliable than those deemed as low risk.
The root of the problem
The problem is that credit scoring techniques are becoming increasingly archaic and leaving banks unable to service both existing and potential customers. Traditional ID verification techniques fall down for the 9.5 million consumers who don’t have a passport or a driving licence – that’s 17% of the population. Consumers with no permanent address or who move often can also be flagged as high risk and therefore have problem opening bank accounts and accessing credit – which particularly affects members of the armed forces and students or even those who have travelled a lot and lived abroad.
All financial services firms have a responsibility to treat customers fairly. We believe that banks turning away consumers verges on breaching Treating Customer’s Fairly regulations particularly as there are now effective pioneering methods of being able to credit assess consumers through big data analytics.
Stepping into the light
The implementation of big data analytics can enable individuals who are traditionally viewed as high risk to access credit – potentially for the first time. Individuals who could benefit include young people without a long-standing credit history who are struggling to buy their first home and foreign immigrants unable to transfer credit history between countries. We’ve already seen this have a big impact in the ability to verify ID and increase loan accepts.
Our claims are evidenced through our recent study published with Visa Europe Collab. The research reveals how online social footprints can be used to boost financial inclusion, detect fraud, enhance contactless and e-commerce and enable more targeted marketing – all on a consent-only basis. The results demonstrated that utilising social media data can benefit both consumers and businesses.
Pioneering new ways to verify ID
By applying advanced data analytics, natural language processing, the big five personality traits and other psycho linguistic profiling techniques to people’s social media interactions, the study identified that these methods could create a new, effective way to verify consumer identity and widen access to financial products. ID verification through pioneering social data analytics is particularly revolutionary for some developing countries where large portions of the population have been excluded from traditional financial services or may not have official identity documents.
According to our study and the results we see each day through our business, social data driven services could also increase addressable markets for lenders through the introduction of alternative methods of risk assessment for individual borrowers. Implementation of this type of analysis could enable individuals who are not able to provide adequate assurance to lenders through traditional data sources such as credit checks.
And when it comes to debt, the study found that by combining social data and financial history, consumers could actually be protected from over-spending. Information around planned expenditure, trends in financial consumption and upcoming expensive events, such as birthdays or weddings, are all available through the convergence of social and financial data and by integrating analysis of this information into banking and payment applications, real time preventative measures, which protect consumer credit ratings and lower lending risks for banks could become a reality.
For a student with a loan that is due to last an academic term, social and financial data could combine to provide individuals with accurate real time monthly expenditure projections intervening with warning messages when spending behaviour is likely to be unsustainable.
The research also highlighted the possibility of preventing fraudulent financial transactions before they take place.
For banks and e-commerce merchants, the challenge is to accept as many good payments while avoiding fraudulent ones, and with the use of social identity verification it’s possible they can authenticate transactions more accurately and enhance their existing fraud detection capabilities by tapping into social data.
In addition, the possibilities for greater and more accurate personalisation and targeted marketing campaigns were also identified in the research paper and, with the intelligent application of big data analytics, this could potentially increase engagement and up-take in financial services products and services. Currently, due to the vast amount of unwanted and irrelevant offers, the average click-through rate in the industry globally is just 3% but personalised and relevant targeting could see this rise significantly.
Revolutionising the industry
The FinTech revolution is creating opportunities for the industry to innovate and take major steps forward – for individual businesses and the sector as a whole. The FCA report highlights that consumers’ ability to access financial services helps to improve market integrity, drive competition and promote financial stability and economic growth. However, as it stands, potentially millions of UK consumers cannot use the services that would help them meet their needs and play a wider role in financial markets and the economy. It’s understandable that banks can’t make meaningful decisions, such as loan acceptances or even something as fundamental as verifying identification, if the data isn’t available through traditional routes. However, this is where big data steps into fill the breach, and as financial institutions begin to utilise it, we’re starting to see a revolution.
We are making ground-breaking discoveries each and every day through big data analytics and what’s exciting is that as an industry, we’re only just scratching the surface. Big data has far-reaching possibilities in its ability to positively impact both the consumer and businesses.
James Blake is the founder and CEO of big data analytics firm Hello Soda