The CFBP's turn to nonbank supervision was fast, but not unexpected, says Dave Hanrahan, CEO and Founder of Kredit. Digital recovery and debt collection is now just another (painful) customer service issue for digital banks and FinTechs, and customer service and support will be crucial in the next twelve months, Hanrahan says.
What we cover in this conversation:
- Partnering with an experienced organization that has the same values as yours is key to maintaining a customer base;
- The CFPB will use its supervisory power to review FinTechs, which means that partnering with a good network of third party organizations to help guide you through that process will be critical; and
- What digital banks and FinTechs can do to protect their investments and continue to grow.
Check out the video, or read the full interview transcript below.
Erin Kerr (EK):
Hi, everyone. Thank you for joining me for this episode of Think Differently. I am here today with Dave Hanrahan of Kredit. Hi, Dave, how are you?
Dave Hanrahan (DH):
I'm doing well. How are you?
I am doing really well. Thank you so much for joining me today.
Happy to be here.
Today we're going to talk a little bit about how to think differently about collections as it relates to FinTechs. This is really in light of the recent CFPB announcement, which we will get into a little bit later, but I'm going to turn it over to you with some questions, Dave. How would you describe the current economic climate?
Obviously it's very unsure and has a lot of people worried, but the very simple way I think about it is: it's like the Sunday scaries.
Everyone knew that it was eventually coming and no one wanted it to come as quickly as it did. But it's also something that we all know we're going to get through. It's just another Monday morning. I really think it is part of the cycle that we've seen over the past decades that people are going to be able to navigate. But I think it's something people have a lot of apprehension about right now.
Absolutely. I think that's definitely true. It's funny that you say that; I've never heard that comparison before, but it makes a ton of sense, especially for companies who've been through an economic downturn in the past. So what are your predictions for the next 12 months, off the heels of what you just said?
As we think through recovery operations in the context of the next 12 months, the credit cycle is really coming to a point where the delinquency rates of a lot of organizations are in high focus, and the operations of FinTech's and creditors on the backend servicing side are going to need to get really, really sophisticated.
Now, as we think through the past 24 months, obviously FinTech as a category have seen a ton of growth, really around taking very straightforward pools in the neobanks and in the lending ecosystems and applying them to very niche consumer populations whether that's geographical or focused on a very specific persona of individual.
As we think through how those FinTechs are going to continue to evolve, it's really them saying: Hey, we've figured out how to originate banking and credit products in these niche categories, let's go figure out now how to service those specific sets of individuals when times are not as pleasant and when the going gets tough.
So, as I think through the next 12 months, I think it's really going to be about taking the approach of: Hey, we're really, really good at originating new financial products. Now let's get really, really good at customer support and servicing those relationships to consumers’ benefit.
Now, FinTech organizations and banks and lenders in general are sophisticated organizations. They learn very, very quickly. As I think about the next 12 months, it's really about applying that very rapid learning process to the recovery operations and getting really, really smart on how to do that well, and in a consumer conscious way.
Great. Thanks for sharing that. You covered it a little bit, but how should FinTechs prepare for a potential economic downturn? Specifically, where should they be investing?
The dollar investment is not going to need to be super significant. That said, the time investment is going to be really, really important.
There are lots of really smart organizations out there who have been thinking about recovery operations for the past 20, 30, 40 years, and how to do those really well, specifically with different asset types and different delinquency stages and across different specialties. Being able to find a network of third party organizations who can really act as managed service providers to help a FinTech or a lending operation through the next year and building those relationships and being able to mutually learn from the recovery operations expertise, but also the FinTech and technology expertise will be critical.
So, I would say: invest as much time now building strong partnerships with organizations that align with the FinTech’s values, and that will essentially be able to help each of the organizations that need to learn really quickly do it much faster than they'd be able to do on their own.
I think that's great advice, and might be a relief to most people who are listening to this in that the dollar amount might not be that high, but the time amount will be. It’s great to start now. How should FinTech's frame recovery management as part of their operations without sacrificing their focus on growth and consumer experience?
The easy way to frame it is: a recovery organization that you're going to work with, or your recovery team internally, [should be] an extension of the customer service side of your business.
It’s just a different customer service issue. It's a really painful customer service issue. Someone might be late on their payment and there's probably some other underlying issue that leads to that. But it's really just another customer service pain point. Finding the best way to interact with the consumer when they fall on those hard times via [multiple] communication channels is going to be really important, but also finding the right person to have that conversation with the individual, who might be focused on the nuances of those interactions from a regulatory perspective and making sure that everything that the individual says to the consumer is compliant.
But also finding organizations that really carry the brand voice that a FinTech or a lender wants to have with their consumer populations. The worst experience a consumer could have is if they start getting a phone call from someone that they don't remember initiating a relationship with, with zero context on why that person is reaching out to them, especially if they're asking for very sensitive financial information to identify that individual.
Ss, as you think through who it is that's going to be reaching out to that consumer, I would think about who that individual would want to hear from, and how to [best communicate] with that individual, because if they're working with a FinTech organization to take out a loan or use banking products or other tools, they're likely digitally native. They likely want to hear from a digital first organization that is really going to be able to adapt to them and their proclivity to use technology. So long answer short: I really think it's about finding the organizations that can either internally or externally just be an extension of your brand, not necessarily go and recreate it altogether.
I think that's a great point and something that we talk about a lot on the Innovation Council and at iA Strategy & Tech, which is this idea of a digitally native consumer all of a sudden getting calls and letters from a collection agency that they don't recognize. It's a terrible customer experience. One thing about FinTechs is that they do have consumer-centered policies. Certainly great points there, Dave. Who can the FinTechs learn from when they're setting up recovery operations for the first time?
To be honest, it's the same recovery organizations that have been working with credit card companies and online lenders over the past decade.
Those organizations have a ton of expertise that is very industry specific. The technology tools at the end of the day are pretty straightforward. It's really just eCommerce marketing tools applied to a new industry, so there’s not a ton that needs to be repurposed, but the operational expertise that really drives how you engage with consumers and when you engage with consumers, the different flexible repayment options that you deliver to them - that knowledge is, is so, so valuable.
I would look to the universe of organizations that's focused on recovery operations historically, and finding key partners to work with that can really act as a managed service partner.
Great point. So, to pivot a little bit into something we mentioned earlier: everyone has seen, or hopefully has seen the CFPB’s announcement from, I think, late April about expanding oversight onto FinTech specifically, but some other areas too, that had not historically been subject to their oversight. What are your thoughts on that?
I think it's a no brainer.
I don't think it surprises anyone. The CFPB's job is to keep consumers safe and to promote the long term success of organizations that are legitimately servicing those consumers. As we look at how technology has become pervasive across financial services, to expect the CFPB to not have oversight there, I think would be shortsighted.
Now, the strategies [the CFPB] takes to engage with the community and learn from the FinTech ecosystem quickly are really, really important. I think there's some well-intentioned people in the CFPB who are focused on that. But I think it would be a little naive to think that they would not enter the FinTech ecosystem, given how large of a piece of the broader financial services ecosystem it's becoming.
So now the magic question: how will FinTechs need to operate differently or Think Differently about their services in light of the potential economic downturn and CFPB oversight?
There’s two sides essentially to the consumer relationship. There's the origination side or user acquisition, and then there's the servicing side, or being able to manage when relationships don't go as well as you would hope. Those two sides of the business directly inform each other.
If a FinTech experiences a large turnover within their customer base of people not repaying credit products or turning from their service, then that influences how much money they can spend acquiring consumers up front. The general impact will be organizations getting much more cost conscious when they're going out and spending money on acquiring new customers through different online or digital channels or offline channels.They're going to care a ton about
Do the dollars I invest in servicing or acquiring that consumer upfront get reflected downstream? Are those good customers for me, long term?
I think you'll see a lot more sophistication around how you manage that relationship with a consumer long-term, so that the organization can much more specifically forecast [their marketing strategy and hiring strategy] upfront.
I would say it's a much more sophisticated approach to servicing. The CFPB oversight will play an incredibly important part in that. Given that, when consumers fall on hard times, they're broadly categorized as higher risk, and they need to be protected through that experience.
I would say it's [a more sophisticated approach to] how the businesses think about interacting with those consumers, but also [a more sophisticated approach to] partnering with the CFPB to make sure that through these tough times, each organization is treating consumers fairly and working with them in a way that really promotes their long term [financial] health.
That's a great summary of some of the changes that we’re going to see in the FinTech space in the next 12 months and beyond. Thank you so much, Dave, for putting those thoughts out there.
Is there anything you wanted to add before we close out?
No, I think that's it on my side. I think there's going to be a lot of change over the next 12 months, and a lot of growth. I think it's really going to be beneficial to the organizations who can make that leap, and can invest the time to find the right network of partners.
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