Managing Risks for Online Lending Products In Different Countries
As more lending companies got to use Knowru mainly for their financial risk management, I got to work with Chief Risk Officers in different countries and better understand the differences in their risk management methodologies. In this blog post, I’d like to highlight some environmental differences across countries and these differences’ implications on risk management.
As more lending companies got to use Knowru mainly for their financial risk management, I got to work with Chief Risk Officers in different countries and better understand the differences in their risk management methodologies. In this blog post, I’d like to highlight some environmental differences across countries and these differences’ implications on risk management. In the concluding part, I will emphasize my own lesson that there is no single risk management methodology that works for all scenarios and CROs need to fully understand their landscapes and competently evaluate their actions’ results, ensuring at least their measures are understandable and appropriate though might not be the most user-friendly.
Difference 1. Credit Data Management
ID verification. Not all countries have ID numbers. For examples, in UK, a lending company has to use a combination of name, date of birth, address etc. to identify an applicant and thus be able to pull the applicant’s credit data from 3rd parties
Credit data management entities. In China, though there are other credit vendors, the People’s Bank of China, a government agency, provides credit reports. This agency provides the most comprehensive data but passing their requirements to actually use their reports is difficult. In US, the major credit agencies (Equifax, Experian and TransUnion) are all private and for profit. In 2012, the Consumer Financial Protection Bureau (CFPB) started supervising these agencies at the federal level. As a financial institution can report to only one agency or all agencies, the amount of data and evaluation on an applicant might be different across the three agencies
Credit data storage. In South Korea, a financial institution cannot store credit data of applicants that it refused in order to protect the applicants’ personal information.
Difference 2. Consumer Behaviors
- Payment methods. In US and South Korea, people mostly use credit or debit cards to make payments. In China, people use smartphone apps such as AliPay or WeChat Pay that are connected to the users’ bank accounts. In South East Asian countries, most people use cash to make payments. This influences credit agencies’ cover rates. For example, an Indonesian credit agency’s cover rates as defined in getting any data on an applicant might not reach 40%. Even when you receive a report on an applicant, the provided data might not fully describe the applicant’s credit history
- Communication methods. In China, people rarely use emails to communicate their personal matters. Therefore, risk management measures based on email addresses such as using email addresses as means to register/verify or looking at email addresses’ histories won’t be effective in China.
Difference 3. Laws, Regulations and Government Policies
- In US, discrimination is a big topic and a lending company needs to be able to prove or explain that its every lending decision is not discriminatory and is based on (purely) its prediction on applicants’ credit performance. Because of this requirement, companies tend to employ more explainable methods such as regressions and score cards
- In China, cash loans are not allowed and a lending product should be designed to serve certain purposes, such as buying electronics, furniture, travel etc. Markets selling these different types of goods are different (e.g. consumers applying for lending products to get plastic surgeries are different from those to get smartphones) and this situation requires CROs to study each market’s participants, trends and consumer behaviors comprehensively in order to successfully establish risk management strategies targeted for each specific scenario
- In South Korea, the government significantly influences financial institutions’ lending policies in its effort to achieve policy goals. For example, in the last 90s, it lowered the criteria in obtaining credit cards and thus promoted adoption of credit cards among the public in order to boost consumption. In the last few years, it issued restrictive policies such as mandating banks to refuse applicants whose financial metrics (e.g. debt-to-income) goes above certain thresholds in order to curb the country’s ever-increasing real estate price.
So far, I have listed some examples that demonstrate how the landscapes for consumer lending products can be different across different countries. Especially at the lending decision stage, which is one of the most important risk management measures if not the most important, CROs need to carefully consider the following factors:
What data on applicants are important
What data are available
How to validate the collected data’s truthfulness
How to obtain data that are important and available efficiently
How to make a decision based on the collected data
How to manage decisions and collected data.
Indeed, even in one country, a CRO might face a situation where she needs to manage risks associated with a new product for different consumer groups with different regulatory settings. I hope that the above examples help CROs in such situations brainstorm key factors in designing their risk management strategies.