How TurnKey Lender Is Posed To Help Creditors During and After the 2020 Crisis

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The Lend Podcast with Elena Ionenko

TurnKey Lender Co-Founder and Head of Business Development, Elena Ionenko, addressed the challenges and opportunities that lenders face during the COVID-19 health and economic crisis on The Lend podcast with Joseph Arnaud.

Elena shares her insight on:

  • Lenders who will be most affected by the COVID-19 crisis
  • What percentage of the loans will be originated online by the end of 2020
  • Will the store-front lending survive
  • How can e-commerce retailers and service providers capitalize on digital lending
  • Government-backed opportunities for lenders and whether to use them
  • Necessary integrations for efficient digital lending
  • How TurnKey Lender addresses the needs of the SBA-qualified lenders

Joseph: Thank you for joining us. I’m excited to talk about your solution for the small-dollar lending industry so let’s go ahead and begin. What products or solutions does TurnKey Lender offer to the small-dollar industry?

TurnKey Lender is a provider of end-to-end automation solutions for lending including the small-dollar industry but it isn’t limited to it. We’ve been working with all kinds of lenders like business lenders, consumer lenders, retail lenders, etc for more than six years. And we are helping our consumers, the lenders, do the risk assessment properly for digital lending, to manage their portfolios, and to balance them in the most intelligent way. We can do that because TurnKey Lender is very strong in the domain of AI, we process a ton of data, and we build the best models to make sure that the risks are kept under control even in difficult times.

Now, there’s a lot of economic impact on small businesses, especially on those that have lower wages and fewer savings. So we expect the demand for this kind of loan to be huge in the upcoming months, unfortunately. A fresh report, covering the impact of COVID-19 shows that even in good times, e.g. 2019, about 40% of US adults couldn’t cover $400 emergency expenses if they had to.

So you can imagine that with all those businesses shut down and so many people losing their jobs, the demand for short-term credit would be growing. For these lenders, we provide an end-to-end solution with complete automation of borrower evaluation, loan underwriting, loan servicing, and collection. It’s cost-efficient, it’s based on the actual number of loans they process. We think we make a fair contribution to recovering the economy after this distress.

J: Definitely agree with that. Especially now lenders will need help as far as making smarter decisions. And it sounds like that’s something you can help provide.

When we talk of all those people who were affected, in many cases they don’t have a formal credit history or their credit is bad. That’s something new that lenders have to understand and implement – traditional approaches to credit scoring might not work anymore.

So you have to take alternative scoring into consideration based on data other than just the credit bureau data. For example, mobile data or partial payment data. That’s something that becomes more and more important – using alternative scoring methods when you assess the credit-worthiness of your potential borrowers.

J: Let’s talk about some of the potential challenges the lenders may be facing here. What resources do you believe lenders have to help keep them in business now and moving forward.

We know that the government introduces several initiatives, especially for small businesses. A lot of programs were announced already, more are under development. So we can expect more cash infusion in small businesses. Small Business Administration has announced this Disaster Loans Program offered to small businesses.

And they have very strict requirements to qualify. What we do is we have our solution preconfigured to this kind of loan so that lenders could prequalify any application in less than two minutes. So in order to do that we integrate with accounting software, with traditional credit bureaus, etc. Basically, when a business applies for a loan and they provide their consent to share their accounting software information, in less than two minutes the lender will know if this business qualifies for this or that type of loan.

J: So for example, you’re talking QuickBooks or something similar?

Exactly, all of the most popular accounting software solutions. We work with them, we facilitate these integrations. It’s basically just one button click for a lender to get a complete picture of the potential borrower. We live in different times and lenders haven’t dealt with such situations in the past. Especially alternative lenders, online lenders – this industry is fairly new.

It’s very important that they start to look not just at traditional ways of evaluating business by financial ratios or traditional scoring models. These might not work anymore. That’s why we look at the financial positions of a business dynamically.

We not only calculate the ratios but also look at the bank account statements. We monitor the cash-in and cash-out situation. It’s very important to look at the broader picture. We consider new data points, new parameters when evaluating creditworthiness.

J: With the Fed cutting rates, is emerging cash advance a reasonable way to move forward or are there better alternatives?

We think it’s a great way. Historically, that was one of the best ways to help lenders and suppliers in the past, during previous crises. It’s a really good way to keep the businesses afloat. And we already have large e-commerce customers who have started the in-house financing programs in the past, even before the crisis happened.

They were offering cash advances to their merchants and they could see a great positive impact on the revenue, the overall cash flow for suppliers but also for themselves. We think it’s a great way for everyone to move forward and overcome the consequences of this crisis. We also think that all forms of invoice financing and factoring are going to be in great demand, because businesses just need some help to have their ends meet. That’s one of the ways to help the economy recover.

J: What are your thoughts on peer-to-peer lending?

Peer-to-peer lending, if you remember, first emerged after the 2008 crisis. There was a lot of demand for business loans. Banks turning away from small businesses, from startups. That’s how this whole industry basically developed – the demand for business loans were huge.

All the p2p lenders will be affected by higher defaults. And again they will have to understand that the existing scoring model will have to be adjusted. I think, that with proper risk management, with the proper adjustment to the new environment, peer-to-peer lending will keep growing. Because the demand will be growing. And again we can see the rise in the default rates. But they can compensate that with interest rates that they can charge with growing demand.

Peer-to-peer lending can be a good resource for a lender to seek funds to keep their cashflow up as well. I do agree that the default rates coming in are going to be higher as this COVID-19 takes effect over the whole of the country. And other countries. It will create a problem for a lot of lenders when they don’t get the cash flow that they’re used to getting from payments.

But again, those who have a more solid approach to their credit scoring, who has better credit scoring models, will survive. They will be affected but not as bad as those who don’t do their risk assessment in an intelligent way. Businesses will be seeking capital. Also there are multiple government initiatives and banks will be open to offering small loans.

The demand for this kind of loans will still be high. So those who will be able to adjust to the new environment will rebalance their portfolio and be fine. They will have to implement new approaches to credit scoring. And we have to look at different industries differently because not all industries will be affected equally. Some are at higher risk (like retail, restaurants, professional business services like hospitality). You have to look at each vertical individually. And even within each vertical, you have to evaluate the actual position of the particular business.

Let’s say for a restaurant, everyone’s revenue is dropping 90%, but you can see some restaurants which only dropped 60%. And that’s the business you have to be lending to, because it has a higher chance of surviving. There will be big changes to the risk assessment approaches. And those lenders who have flexible, adjustable decisioning engines, those who will be able to configure their underwriting processes quickly, they will survive and they will be growing.

J: You mentioned changing underwriting processes quickly. I know for a lot of lenders that’s not an easy task to accomplish. How do you think a fintech strategy can be a gamechanger for a financial institution?

I think it’s the only way to go if you want to survive. In the ever-changing economic situation, with all the uncertainty, you can’t keep using the old rigid and hardcoded solution. You’ll have to have something dynamic, and easily-adjustable, and flexible. Scoring and decisioning that you can adopt quickly when you need to.

Fintech is one of those industries that will benefit from this economic downturn. Even several years ago it’s been predicted that fintech is going to take over the world. Venture capitalist, Angela Strange, from Andreessen Horowitz said that fintech is eating the world.

And we’ll see that happening now. So not just the traditional lenders will flourish, but any kind of business who incorporate fintech in their day-to-day operations. They would offer installment loans or any kind of financing to their customer base. So fintech will become just an embedded part of a digital operation.

We see that happening already. We see customers operating not only in the lending industry. But also in healthcare, also in retail, in manufacturing. They are already embedding fintech in their customers’ digital journey. We’ll see more and more of that happening.

J: With voluntary and involuntary quarantines for lenders, we’re in a decline. Do you think it’s going to make it more rapid of a decline? 

We think store-front lending will be over by the end of this year. Even last year, most analytics predicted that by 2025, 90% of all loans will be originated online. With all the social distancing, we believe that by 2020, 100% of loans will be originated online. You see that we’re all on quarantine, and the banks are closed, and the only way to get financial services is online.

So for banks and credit unions, it’s inevitable to start implementing digital lending solutions, all kinds of online services as soon as possible if they want to survive, if they want to keep their relationships with their customers. Because people would go online and search for options available regardless of whether they are a customer of a particular bank or not.

With online lending, those companies that offer better terms, who are able to make the decisions quicker, they will win. Unfortunately for store-front lenders, it’s the time to make this shift even though they may have been hesitating and didn’t know how to approach this in the past, now they have to do it as soon as possible. It’s inevitable, it’s the only way to stay in business.

J: And how does TurnKey Lender help clients in this evolving time?

We offer end-to-end solution for complete management of the entire loan lifecycle. It’s a modular system, depending on the specific lender’s preferences, we can provide just an underwriting module, we can connect it to their existing website or we can provide the complete front-end for the borrowers as well. Our system comes with an online application form, it comes with a complete borrowers portal where they can login to see and manage their loans, they can download all the statements online, make payments online. So complete front-end for borrowers is available.

With the back-end for lenders, we provide different workplaces for every single stage of the loan lifecycle. We do automatic prequalification, we have a very flexible scoring engine which includes both credit scoring model, statistical model, and rules. So in less than 30 seconds, we can do complete prequalification of a specific application.

We also can do automatic decisioning and approve all the low-risk applications automatically. We can reject high-risk applications automatically and we can send the applications in the middle to an underwriter for manual review. And they, in turn, have all the information presented to them in a simple, intuitive form so they can make the decision quickly.

We do loan servicing and we are integrated with multiple payment providers for automatic disbursement and collection. We have a dedicated module for loan collection where we not only have tools for soft collection but also all kinds of early warning indicators based on our AI-algorithms so that collection can be optimized even in these difficult times. We also have a reporting module allowing for real-time monitoring of the portfolio. And allowing for quick decisions if you need to rebalance your portfolio and so on.

Basically we have a turn-key solution for unified lending management which can be deployed end-to-end or one module at a time, depending on the lender’s needs.

J: That’s a lot of great information, I have some questions based on that. When you say soft collection, what do you mean by that?

We mean that all the notifications and emails reminding of upcoming or past-due payments are automatic. We also have a very flexible designer for custom messages that a lender can send to their customers. Reminders of upcoming payments, notifications that payment was received or not received. Then, we have action planning tools for collectors where they can set priorities for different accounts.

We can also sort the accounts depending on collectability. We calculate the collection score for each account and they can then be distributed among collectors depending on the complexity or probability of collection. The system automatically provides scripts for collectors when they have to make calls to borrowers.

So all the info about the loan, outstanding balance, payments is presented to them. If a borrower makes a promise to pay, the system logs this information and then makes sure the payment was made. Consequently, we present additional reminders or we adjust the schedules accordingly. We also have a very flexible restructuring interface. Especially now, since sometimes collection will be challenging, we have an intelligent algorithm to simplify the collection efforts.

For example, if you know that some industry is going to be getting government help and this initiative comes into effect in 2-3 months, then you can adjust the loan schedule for this specific industry accordingly. This way you don’t chase your borrowers until they get the crisis relief support cause you know they will be getting cash later and you’ll be able to recover your payments later. The system is designed for the flexible implementation of deferred payments, rollovers, and so on.

J: I imagine on the risk assessment or the scoring engine, I’d be able to change my underwriting if I knew a certain industry will be affected particularly hard, such as the restaurant industry, this reminds me of similar but not to this extreme when the government shut down. And it had government workers who were maybe furloughed or laid off until the government funded the budget. Something like that where it could change the industry, I would want to add that to my scoring model for the specific group of people until maybe I start to see a turnaround. 

Absolutely, that’s why we keep stressing that it’s critical to keep a flexible decisioning engine where you could adjust your decisioning rules and the scoring model quickly. We provide special tools where the whole underwriting process is not hardcoded, it can be mapped by the business users in a graphical drag-and-drop interface whenever needed.

So basically, you can design a new credit product, change your approaches to credit scoring and decision making within hours. We have clients in Europe, specifically in the UK, when the Brexit was happening, with our solution it took them just one night to adjust their processes and document management to the new environment.

If you have an in-house developed software, if you have a system that is hardcoded, that becomes extremely challenging. It’s just like a brick wall, and your scoring model and the decisioning rules are bricks in it. So you have to take the wall apart in order just to replace those two bricks. In the new economic environment, it’s becoming critical to have the ability to adjust quickly and that’s where a flexible decision engine can help a lot.

J: You’ve mentioned automated decisiong which is the goal of most if not all online retailers. Would company be able to run, say, an AB test with 50% using automated decisioning and 50% manual underwriting, working every lead themselves to see which has better results? 

Absolutely, that’s standard functionality in our system. You can test multiple processes and approaches simultaneously. For example, in champion-challenger mode, you can see the actual financial results of each process before you implement it as the main strategy.

We support AB testing and cyber-security is getting more and more important. We support all the standard precautions, the four-eyes principle, maker and checker kind of approach so that changes cannot be done by just anyone, only by designated staff.

We have access rights for different decision-makers to make sure that any strategy is checked and authorized by the right person before it’s implemented. And then you can test and see what works and what doesn’t. You can implement quickly and see the forecast of your financial results before you make any changes. All that is default functionality in our Enterprise solution.

J: Are you finding that lenders are changing their underwriting right now? Or at least in the last couple of weeks decided to change it a little bit?

What we see now is everything’s on hold. Everyone’s holding their breath and don’t make any quick decisions. With the quarantine being enforced just recently, I think that businesses are still holding back and trying to understand what will happen next.

Over the next few weeks, we will be seeing the changes in the underwriting processes. With these changes are yet to be seen, we know that some industries will be affected more, some are actually benefiting from the existing situation, like gaming, cybersecurity and all kinds of online-related services.

But we’ll definitely see changes in the underwriting process. Starting with this shift from one industry to another and in consumer lending, we’ll see a lot of changes. It hasn’t happened yet but it’s definitely coming.

J: Circling back to risk assessment, what data points does TurnKey Lender gather to help in analyzing applications?

It’s different for every industry. We have clients who provide business loans, consumer credit, who operate in the subprime niche. And for each industry, we collect different data points.

If we talk about consumer lending, then in addition to traditional credit bureaus information, depending on what data is available to the lender, we’lllook at certain demographic data.

We also have a separate solution for psychometric scoring. That’s especially important for the subprime segment where people don’t have a formal credit history. They are invited to go through a short test where they are asked a set of questions. One can’t guess the right answers. Based on the responses, we build their psychometric profile and can make decisions on the level of their integrity, risk-taking abilities and so on. Based on this info we can make a decision.

We also support risk-based pricing, so depending on where a person is on our credit risk scale, we can offer them better terms or a slightly higher interest rate, we can decide on the credit limit or on the term of the loan. In some cases, we partner with mobile operators, and we can use some of the mobile data. That’s especially relevant when mobile operators start offering some kind of emergency credit or some consumer credit to their subscribers. For different use cases, we have different types of scoring models for consumer lending.

For business lending, we look much deeper into the company’s financials. We don’t just consider traditional ratios or credit bureau information. We look at the bank statements, cash flow, consider the broader company profile (firmographics), other data points like the average check size, changes in the volume or size of the transactions. Thanks to that we are able to provide lenders with early warning notifications even before the customer shows signs of actual financial distress, we are able to capture this in advance.

And even right now our data analysis team is working on adjusting scoring models to this new environment. We are implementing new parameters that would help our lenders to score potential borrowers in this economy. There are literally thousands of data points and we offer a unique industry-specific model to each of our clients.

J: We have talked earlier about automating the lending process and you mentioned how you can run different campaigns. For example, someone with a lower rating gets a different risk score. Can this also be automated from the application? Where the system would automatically generate interest rate, the terms based of course on the parameters of the lender so they can run multiple campaigns at the same time?

Absolutely. That’s what our solution is designed for – instant and accurate decisioning depending on the risk level, on the industry, credit product. Everything from application processing and initial data gathering to in-depth analytics of this specific business, and the paperwork generation, and the actual loan disbursement can be done fully automatically.

That’s the essence of our solution. We provide a digital lending system and digital lending has to be done quickly and automatically. The system will pick the right parameters for the specific loan, it will dynamically generate the set of documents for each specific borrower, and it will automatically send these documents for e-signatures. So pretty much everything can be put on autopilot.

J: Do you believe now is the time for lenders to create a new strategy, policies, underwriting strategy for when the COVID-19 dust settles?

It’s the perfect timing because everyone’s holding back a little bit and trying to understand what happens next. Regardless of the outcome of this pandemic and the economic crisis, digital lending, digital financial services are the way to go.

Right now we see that many lenders are working on their business continuity plans and trying to implement the new strategies as fast as possible. We can expect certain budget cuts for technology so it’s critical for them not only to implement new approaches but to do it on a limited budget.

That’s why our pricing policy is success-based. We don’t charge for bad loans or for processed applications. Our pricing policy is based on the number of good-performing loans that a lender has. That’s our guarantee to the industry that we put all our resources, knowledge, all our intelligence to making sure that they have well-balanced, healthy portfolios.

We are yet to see how the financial industry copes with this crisis. Time is of the essence. The sooner they implement digital solutions, the higher the probability of getting out of that crisis with fewer losses.

J: There’s always going to be a need for the credit product. Online lending is obviously a growing industry, it’s the way to go. People are going to need money when they start going back to work. I believe changing the underwriting now and creating a new strategy for when this does go away would be very smart. Do you?  

Absolutely, and we see many traditional lenders who used to operate in a certain way for decades. They are scared and hesitant to implement new ways of doing lending and business in general. Just because they haven’t done it before and because they don’t know how to approach it, what resources they might need.

Right now it seems like everyone’s forced to go this way and everyone has to actually stop procrastinating and start doing. There are a lot of consultants who help financial institutions implement these new digital business strategies. We gladly share all our expertise and the best practices we see with our customers.

Not only in the banking industry but other industries that start adopting fintech for their regular operations. We are happy to share and consultancy is an integral part of our services. We believe that the financial industry will go through a lot of transformation in the next 12-24 months and the banks and credit unions will have to go through it. And the sooner they start, the better off they are going to be.

J: Elena, I found our discussion formative and I appreciate your time today. Is there any question that I didn’t ask you that I should have?

I would probably want to add. We were mostly talking about financial institutions but it’s very important for all kinds of businesses, retail first of all, to start considering and offering financial services to their customers as just a standard part of their consumer relations. That’s a great way of keeping their customers loyal, preserving their data.

When people get back to work and start buying necessities and all kinds of good again, they will need financial assistance. Now they have to go to a third-party lender or some financial institution to get this help. If retailers offered the same kind of Buy Now Pay Later plans or installment plans to their customers, that’s a great way to preserve these relationships and keep the data in-house.

Because you know how valuable data is, so sending their customers to someone else is not something business can afford anymore. They have to keep and preserve customer relations. We think that fintech as part of the retail industry is something we will see more and more of. So retailers should strongly consider fintech as a part of their crisis recovery strategy.

J: What you’re talking about is embedded lending?

Yes, embedded lending. So crediting is not the core business but just a nice addition to the main business. This allows to keep the customers loyal and sell more.

J: Are you finding that many retailers with embedded lending, do funding themselves or use third-party as well?

What we see now is most retailers send their customers to someone else. They haven’t done lending before and it seems like a very complex and sophisticated business by itself so they’re not ready to hire banking professionals and create a dedicated credit department yet.

But the Buy Now Pay Later lenders can help retailers understand that lending can be done quickly and easily. Especially if you have the right tools for evaluating your risk and the right tools for managing the entire lending process. So lending is getting less scary for them, they start to understand this concept, and they will be implementing embedded lending themselves.

Because what happens now is when you send your customer to a third-party lender, this lender works with multiple retailers. When a borrower comes there they access a choice of competing products or services. So to keep your relationship and lock in your customers, you’ll have to do the financing yourself.

And with an intelligent solution in place, you can do it for less money, since you don’t have to pay the transactional fee to the third-party. You can even set up a small premium on the installments you offer to your customers. Overall, financially, you’ll be better off plus you’ll have all the benefits of providing financing to your customers.

J: Elena, that is all I have for you today. I really appreciate your time and thank you for coming on the Lend podcast. 

Thank you very much, Joseph, it’s my pleasure. I wish we talked in a different environment, with less pressure and a better economic situation. But we’ll see how it evolves. Hopefully, we’ll have a chance to talk again when the situation improves and we’ll have a better vision of where the industry is heading and what’s going to happen next. Thank you!

J: If lenders were to reach out to you, what would be the best way?

They can reach out through our website, Facebook, LinkedIn or simply drop a line at [email protected] and we’ll definitely respond.

We are seeing more and more lenders reaching out and looking for cost-efficient and intelligent solutions. We are here to help.

Get in touch to schedule a TurnKey Lender demo tailored to your business needs today.

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