This article is the second of a 2-part series where I explain how the Credible model fosters competition in a new type of financial services marketplace.
In part 1, we set out how a financial services marketplace would work technologically. This article focuses on users and use cases.
Lenders want easy and efficient ways to assess risk and make loans.
In developed markets we have seen the emergence of credit bureaus that provide valuable risk scores and lenders use those actively in their loan decisions. Brokers are sometimes used to make the lending process simpler by helping the lender gather documentation and to find new borrowers.
Credible provides ways to assess risk, make workflows more efficient as well as providing a marketplace for borrowers and lenders to find each other.
The user experience and flow using a worked example would be as follows:
Merchant requesting a loan through the marketplace (time: minutes)
- Motorbike repair shop wishes to borrow $1,000 to purchase new tools and equipment
- Using the Credible App, the shop manager puts in request for the loan attaching photos of the tools to be purchased along with proof of the price (quotation)
- The shop manager ensures that permissions have been set to allow access to his detailed data, using the Credible App
- The financial marketplace advertises the request and opens it up to 3rd party lenders (including microfinance, banks, peer-to-peer and alternative lenders)
- The shop is able to amend, withdraw or edit the loan request over time using the App and all changes are reflected immediately in the marketplace
Live on the marketplace — Credit Assessment (time: seconds/minutes)
- The loan request is now live on the marketplace. Displayed next to the request is a link for lenders to purchase a credit risk report
- A lender can select a credit risk report provider from a drop down menu or separate page
- The credit report provider is chosen and a unique payment code is generated with the pricing. Lender sends PESA using the code to settle
- The Token Escrow Agent (TEA) receives the PESA and holds pending completion of the credit report
- The credit report provider purchases data from the shop to generate the report in PESA, keeping the difference between selling and buying price as its net fee
- The credit report provider generates a report using AI/machine learning and other algorithms to compute a risk score and returns the report.
- The TEA releases payment to the credit report provider
Loan offering and completion (time: minutes/hours)
- A lender, once satisfied as to risk, offers the shop a rate of interest and payment terms including level of collateral in PESA to be held by the TEA and mechanisms to deduct in-flow payments
- Shop manager receives the offer on the Credible App
- He accepts the terms, completing the loan contract
- TEA escrows the agreed collateral until the loan is repaid
- Loan amount is transferred by the lender to the shop’s bank account
Loan lifecycle (time: continuous while loan is in place)
- Shop manager can see the loan status and repayment using the Credible App
- TEA can assist with repayment through in-flow payment deductions and settle with the lender automatically
- The loan and repayment history is added to the Credible blockchain by the TEA automatically and becomes part of the shop’s credit data history
- Once the loan is repaid, the PESA tokens are released from escrow
- Lender, credit report provider and shop are all able to rate their experiences on each other and added to the blockchain
Credit Scoring Providers
Every lender has a method for assessing risk but often they rely on companies that produce reports and specialise in credit scoring. Credit bureaus have traditionally taken on this role but along with the emergence of alternative and peer-to-peer lenders, there are new credit scoring platforms that use modern smart algorithms.
As the worked example above shows, Credible allows these credit scoring companies to advertise and sell their reports to buyers. This allows scorers to focus more on improving their algorithms than on building parallel marketing distribution.
Credible allows these scorers to provide two base products:
- Rich assessment on a particular merchant (vertical analysis) and
- Limited score on a range of companies (horizontal scan)
The vertical analysis was described in the worked example above.
The horizontal scan would be interesting to 3rd parties looking for companies than meet some base criteria such as:
- Located in a particular area
- With proven revenues above $100,000 p.a.
- In clothes manufacturing
This would be useful for not only lenders but also for companies looking for targeted advertising and market research.
Insurers and other financial institutions
Non-banking financial institutions include insurance companies, brokers and pawn shops among others. The largest organised group are insurers who play an increasingly important role in emerging markets as the sizes of SMEs grow.
Insurers’ main obstacles in almost every market are:
- Product design to meet a real existing need,
- Risk assessment,
- Pricing, and
- Market access.
The first 3 above are done in insurer offices by statisticians and actuaries using data gathered by the insurers over time. Credible naturally plays into this role as a data provider, allowing the assessors access to a rich form of data.
For number 4, market access, insurers employ large sales forces going door to door, since there is often no alternative route to market. This is expensive even in countries with low wage rates given the thousands of people involved.
This is where the Financial Services layer of the Credible SAAS system allows great opportunities to directly sell insurance to known parties where the pricing is targeted at particular merchants.
So a merchant looking for fire insurance can advertise through the Credible app and then receive offers from insurers and the formalities completed through the app. This is the pull model. There is still budget available from a reduction in sales force to use the push model described in the advertising section that follows.
Push advertising and market access
Advertising can be annoying, especially when adverts are unwanted. Virtually all advertising is unfair though in that the company receiving the payment is not the target of the advert. This is true both in the real world (newspapers and magazine publishers get paid not the reader) and online (Facebook and Google get paid not the surfer). This makes the receiver somewhat of a guinea pig.
Credible is different.
Payment by a company to get a merchant’s data requires a payment to the merchant. Similarly, advertising offers to a merchant requires a payment to that merchant. Furthermore, merchants can opt out from receiving any advertising whatsoever. The PESA token and the TEA system allows for controlled access to merchants as well as a mechanism for settlement of micropayments.
The cost to access puts a hurdle on the normal spam we all receive meaning that the advertising will more likely be meaningful to a merchant. In any respect they will be paid for their pain which is better than what we have today.
Many industries supply chains are long and complex and distributors are looking for new retailers and partners to distribute their goods. The right partners can make a distribution business very profitable while the wrong ones can impact negatively through losses and/or brand reputation. Some distribution companies incentivize their channels through trade finance and reasonable payment terms. For each of these use cases, Credible data provides trade partners some comfort about the size and quality of companies and management before entering into relationships.
We are sure we haven’t even imagined all the potential products and services that can be made available across the financial marketplace.
Data underpins good decisions. Something worth paying for.
For a comprehensive write-up on Credible’s envisioned marketplace, download our White Paper.
Questions? Comments? Do reach out to us on one of our channels.
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