In the first episode of our new podcast In Conversation With…our Managing Director, Ben Hutton, talks to the CEO of DirectID, James Varga.
DirectID gives greater, more immediate, insight into customer and business data, allowing banks access to up-to-date risk and credit analysis, without relying on historical data from credit scores.
Ben and James talk about how the pandemic has shaped a new need for access to funding for businesses and how DirectID can be used to give lenders insight into people’s current circumstances for a personalised solution.
Why don’t I play you in? James Varga of DirectID, why don’t you tell me about DirectID straight from the horse’s mouth, as it were?
At DirectID, we help businesses understand their customers. We use bank data, or what the world is calling open banking PSD2. We use that data to help banks onboard their customers and essentially create a better risk credit assessment of an individual customer or business, using the wealth of information they have in their financial accounts, which is their bank data.
What about yourself? What was your path to management and DirectID?
I come from a startup background and I’m a startup junkie. I like solving problems and building things.
Before this I worked with a personal finance management platform called Money Dashboard and helped build that wonderful tool. During that process I realised that while you could suggest to people they invest in products or increase their mortgage payments or get a pension a lot of those processes are still very physically focused, right?
You have to go into branches and sign bits of paper. Keeping in mind that this was 10 years ago so it was a little while ago now. If we can leverage that data that people have with their bank account to show they are who they say they are then those businesses that want to sell financial products online can do it a bit more quickly, a bit more safely and get a richer insight and to the individual. It gives [lenders and banks] something that’s a bit more specific to the individual, other than a postcode or a credit score, which doesn’t have any colour to it, if that makes sense. It’s not dynamic.
So we started 10 years ago with this idea of leveraging that data and we live in a world that's fundamentally shifted now through open banking and PSD2. It’s been a journey, that’s for sure.
How’s that journey been interrupted or affected by Covid-19?
The pandemic has been really good for us. It’s horrible for much of the world, absolutely. A lot of Fintechs are really suffering, not just because of a lack of investment or nervousness in the market or whatever it is.
For us it caused a fundamental shift and has shaken up the rest of the world to think about doing things differently and how to do things differently, because there isn’t much of a choice. A couple of examples are that the idea of going into a branch today is a lot more remote than it was six months ago. There was still a battle for banks and financial institutions to keep that branch and keep that physical connection with customers. But I think today we’ve shifted and a lot of customers don't want that physical contact or they want the option to do it in a more digital and convenient way.
The other thing in our world, around credit risk, is that with bureau and credit agency scores, it doesn’t have that colour and it’s also historical data. So your credit reference or credit rating reflects what you’ve done in the past, maybe 6, 12 or 24 months. Mine today happens to be accurate but for a lot of people it isn’t - whether they’ve been furloughed or lost their job or their business has gone into administration, whatever it is. The world has shifted quite a bit over the last three or four months.
Talk to me a little bit more about that. The traditional model of banking is to look at relatively stable spending and income and those have, as you rightly pointed out, been massively disrupted for people. How do you cope with that when the data is suddenly skewed and there’s no model for it?
This is the beauty of bank data. It’s not three months but typically 12 months that you’ll get when someone is sharing their bank statements in that open banking process. In that last 12 months of data, you could really understand the individual and see those that have more money and those that have less money. That data fundamentally shifts how financial institutions lend to people or businesses, SMEs and Medium Enterprises are a really interesting area.
Just because you have a strong credit score, doesn’t mean you’ll get the product. I like personal examples quite a bit and we all live in a world where it has to relate to us: maybe about a year ago, I went to the Apple Store to buy a phone, thought I’d put it on financing because I wanted the yearly upgrade and Apple Care that came with it. I was willing to pay a bit of interest for that. I have a 992 out of a 1000 on Experian’s credit score.
Almost perfect credit score and for whatever reason I was declined because they didn’t have enough information about me, they didn’t understand my personal circumstances, they couldn’t validate things about me. It’s a £1,000 loan. I just ended up paying cash for the phone, it wasn’t like I couldn’t afford it. But that’s the challenge with credit risk, they’re traditionally risk based processes that are based on very limited data. They don’t have the richness you’re talking about. Maybe in the last four months, talking about the pandemic, you’ve had a job, lost your job and you’re making twice as much as you used to, right?
Maybe as a business, as an SME, you could be a fuel card provider, for example. If you’re in that situation how do you know which of your customers are doing more business than they used to because they're actually Amazon drivers running around all over the city for 12 hours a day at the moment, trying to keep up with demand. Or they used to deliver services for the hospitality industry which is all but decimated right now.
So, you have an affordability product that is able to smooth that out and account for peaks and troughs and what was right in the last two, three or four months is not necessarily indicative of the next four months.
We have a huge amount of insight in DirectID. Essentially, we have an open banking platform, a global platform, we have 13,000 connections to banks in over 45 countries. I tried to work it out the other day and I think about 1.5 billion people could go through the platform tomorrow, which is exciting for us because it’s all about changing the world and not just changing a region.
When people share copies of their bank statements or read only copies of their bank data (again this is regulated activity with the FCA, so it is secure) a big part of what we help do is interpret that data. For example, asking the question: how do we prove your income? Not just for financial services but there are lots of things where you have to prove your income - when you rent an apartment or a flat, you have to prove your income and you can use your bank statement data to help identify your streams of income if they’ve stopped or if they look like they’re going to continue.
I think that’s an important point around credit, isn’t it? The reality now is that it's the less sexy aspects of banking that people need access to: credit, mortgages and overdrafts. Does DirectID have an obligation to give better and quicker access to funds and lending that people need?
Absolutely and how do you support people in those situations, right? It’s not just people that have money, it’s people that don't have money. And those people that don’t have money might still have some income, so it’s about getting something that’s appropriate to them. It’s about data sets that say to them: “because I live in a rich area because of my postcode or a poor area because of my postcode, that doesn’t mean that I make a lot or I don’t make any money.”
The reality of the world we lived in is that it was based on that. This is about personalising it to you, right? This is about saying, as James Varga, here is my income, here is my financial behaviour, here is enough financial information that you can support me as an individual.
I think the other thing we’ve seen that’s really shifted and kind of relates to me as an individual and where we’re going to be in regards to Covid and the pandemic is that we’ve traditionally focused on the onboarding side of lending products and in the last few months, we’ve been dragged very heavily through that full credit risk lifecycle, so into that portfolio management. As a business, you’ve got 100,000 fuel card customers, as an example, how do you know which ones are employed and which ones aren’t? Instead of taking that blanket approach and stopping all credit or reducing all credit, how do you support those businesses that are doing well and the ones that aren’t? There are those individuals who still have money, just as much as those who don’t.
We launched a recoveries product based on the DirectID platform and its about having a conversation with an individual when they do get into hard times so you can come up with something that helps them.
Traditionally, that debt recovery manager or debt advisor would spend about 45 minutes or an hour digging through your bank statements and trying to rationalise it and arguing with you...When you think of the pressure people are under in those situations, it’s naturally a very emotional time and the natural instinct is to try and get away with as little as you can.
You’re in that situation because you don’t have lots of money, right? Then you get this debate that happens between both parties, which you can avoid by using bank data and helping them understand you as an individual and make it appropriate to you.
How do you have that explicit conversation that’s based on tangible data and things you can trust?