Gerald Chappell and Michelle He have spent much of the last decade advising leading banks on how to digitalise their operations. Now the duo, formerly of McKinsey and EY respectively, have struck out on their own with Fintern, a financial technology (fintech) start-up making big promises to transform the consumer lending market.
Fintern is targeting as many as 15 million Britons whose credit scores aren’t considered of sufficient quality by mainstream lenders; these borrowers either miss out on the best personal loan rates from the high-street banks or get turned down for credit altogether, forcing them to turn to much more expensive options such as payday loans or buy now-pay later products.
“I’ve always felt that the near-prime segment of the consumer market in the UK was poorly served by mainstream lenders,” says Fintern CEO Chappell. “The problem is that lenders just don’t understand these borrowers.”
By near-prime, Chappell means borrowers who do not have the highest credit ratings from credit reference agencies such as Equifax and Experian, on which banks tend to rely when making lending decisions. These borrowers may have lower credit scores for legitimate reasons – they may not have much of a credit history, for example, or they may have moved home several times. And even where a lower credit score reflects a problem – an unpaid credit card bill, say – the issue may have occurred long ago.
“I’ve seen this for myself,” says Fintern COO He. “I moved to the UK 11 years ago and found it very difficult to get any kind of credit agreement even though I had a good job with a decent salary, because I didn’t have a credit history.”
Fintern’s solution is to bypass credit scores altogether. The UK’s open banking reforms, introduced three years ago, require banks and other financial services providers to share customer data with third parties, where customers have requested they do so. This enables Fintern to obtain the bank account data of any customer who wants to borrow from it – all their income and spending details. The fintech is then able to use its analytics tools to get a detailed idea of what the borrower could afford to repay each month – Chappell and He believe this is a much more effective and realistic way to decide on a loan application than depending on an artificial credit score.
Fintern’s analysis suggests that its approach could help around 30% to 40% of the 15 million or so Britons in the near-prime market, while reducing the level of bad debt that mainstream lenders would expect by around 50%. This, in turn, enables the company to price its loans more competitively.
Initially, Fintern intends to charge an annual percentage rate (APR) of 18.8% on loans of up to £5,000. This compares to APRs in the mid-twenties that are typical for high-street banks for the same type of customers. Those who the banks turn down may pay even more – twice as much at sub-prime lenders, and far more with payday lenders and other non-conventional credit products.
Chappell also believes Fintern has a golden opportunity to help people get a better grip on their personal finances. “We get a very granular picture of customers’ income and their spending – and how that spending breaks down into essential spending and discretionary spending,” he explains. That data can be shared with customers to help them understand their finances. Fintern will also use the data to explore with customers how to borrow effectively – could they afford to repay a bit more each month, for example, to get the loan paid off more quickly? “People are often very surprised when they find out how even a small increase in their monthly repayment can bring down the duration and total cost of the loan,” adds He.
Another bugbear for Chappell is that banks are rarely prepared to explain why the say no to loan applications. “If we can’t lend to you, we’ll tell you why, and what you could do to improve your chances of getting a loan in the future,” he promises.
Fintern formally opens for business today, but has been talking to potential customers for a year or so while waiting for a license from the Financial Conduct Authority, the chief City regulator. The 20,000 or so Britons who have pre-registered with Fintern not only prove there is potential demand for its product, says He, but have also provided crucial insight on feedback that has fed into its design.
One important feature will be that Fintern continues to have access to borrowers’ bank account data even after they’ve taken out the loan. That will enable them to spot issues as they occur – someone losing a job and their income, for example – so that they can intervene before problems with the loan get out of hand.
Chappell and He believe it will be possible to lend up to £1bn to 500,000 customers in the UK before 2025, but have also begun to consider other markets, with a number of countries now following the UK’s lead on open banking regulation. “Our message is that we make affordable loans based on you, not your credit score,” Chappell says.