2019-02-12 Fintech Lending & collections

Loan business - Fintech- is very complex process and cosinsist of following steps:
A) Market knowledge
B) Usage of the technology
C) Social media - ways to talk to customer
D) Attracting of customer
E) Getting customer on your web
F) Customer start to fill-in application
G) Customer finish the application
H) Data verficiation
I) Knock-off criteria
J) Fraud detection
K) Underwriting
L) Subscription
L) Loan disbursement
M) Repayment
N) Receivables management - provisions
O) Collection - provisions
P) Writing off - sale
R) Back to model - model adjustment

Therefore the company can not focus on collection only, as the whole process us much longer and the first priority is to attract as many customers to apply for the loan. The big amount of resources is spend there. A reasonable ratio of DPD60 is expected, as DPD 30 is the most profitable loans company gets. DPD 90 or DPD 180 is a cutt off, as the money is reasonably not going to be collected and therefore it is a pure loss for company.

Collection itself will also not work one way meaning from underwriting to late payment over management of receivables to collection, but also other way from collection to underwriting - to adjust the model and even sooner from collection to data verification and application setup - as information obtained shall be used to improve health of the company.

A cooperation between all the deparments is critical, as the pairs of departments with different values shall be created.

F.e.
Risk department - financial department
Underwriting department - collection department
Client acquiring - Underwriting
Market knowledge - Social media
Collection - Finance
Finance - Investor
Data verification - Market
Audit - Risk
and so on...

The main objective of Fintech is to underwrite as many reasonable risky loans with good enough cash flow.

It is the complexity of initial steps, importance of matching the data with other sources in beggining and later in collection where the company can improve fastest. As the underwriting models could not be shared and if they could it will be limited as the products change, the market data, knock offs and collection could be done on universal basis that are no company specific.

2018-11-05 NPL and value added creation -> simple model

Setting a model with 3000 loans issued a month, interest rate of 1% a day, 80 EUR a loan, COF irrelevant as it is not calculated inside, NPL ratio variable, 50% of loans additional income from 6 EUR for highest NPL to 1 EUR for NPL of 9%

This graph represent the value added created (diameter of the bubble) depending on the NPL (horizontal axis) and additional income in EUR per loan (6 EUR - 1 EUR). As the loan with NPL of 14,83% did not generate any value -> bubble is non-existent.

Main challenges every consumer finance company is facing

2019-10-02 credit bureau

Once opening a consumer finance company few entrepreneurs consider the usage of credit bureua as a source of data. Points to consider:

a) pricing - how much does such an database cost

b) implementation to the system - can we implement data to our the system, how often can we do that and what kind of data do we need to match

c) usability of the data - does it mean we will not offer financing to the debtor not paying his debt or we add aditional collateral, guarantor, higher pricing, higher initial purchase contribution, higher bonus from resaller, we push insurance....

d) monotoring of the data....does it mean once we approve we dont check anymore or we keep checking

e) database usability....can we put analytical request to the datase?

f) self entry to the database .... can we also suggest a change in database following our data?

2018-09-29 Simple consumer finance diagram

2018-09-29 Consumer finance part II

Consumer finance - NBFCs (non-banking financial companies) are in some countries allowed to accept deposits and in some restricted only to the members of NBFC. Therefore the responsibility of the managements is not only to shareholder, but also depositors, suppliers, regulators, employees and government.

Financially is the NBFC might be not possible to be cash positive if we look on a balance sheet and do not separate cash from operation and working capital cash. Working capital is always needed to grow more and more - therefore it is a critical dofference to standard company, that can decrease the pressure by asking for longer payment terms, proving bank guarantee to suppliers so they can refinance it or even decrease the production time (delivery on time, quicker machines, less travelling of half-finished products). It is also more easy for standard company to get financing for working capital, as very bank branch understands the main setup and risks.

Being cash positive in operations in NBFC - look on following (and u need to achieve it for at least 2 years so investors or banks can trust u).

1. Work with NPL.....already in underwriting stage...learn from mistakes u have done and ask yourself once underwriting what mistake have we done last time and how similar it is to this new approval

2. Focus on profit .... and than adjust costs. It is more reasonable to give additional money or pay additional services from profit than taking them as costs. Reason being the the signalling & ability to pay in eyes of investors and banks

3. Offer value added to debtors. Make them feel they get loan, payment channel, discoint on products, insurance, deposit solution, savings, status, .... look for value. This way u will add more income.

4. Always focus on your COF...costs of fund . They are very much connected to your P&L. If it is good your options to get financing is broader and broader and therefore COF is lower and lower. In the end improving P&L more. It is a circle.

5. For new, more risky projects, consider a branch or daughter company, so u can easily cut it off from main one. Also u can tell invesotors to put money to mew project  but not increase COF of working one

2018-09-27 NPL influence on rate for cross income

The above graph demostrates the income of lending company depending on the NPL ratio (non-perfomring loans ratio to all loans given), interest rate charged (in % per year) and COF 18% p.a. It is amazing to observe, that only interest rate of 42,15% p.a. with NPL% of 1% can cover the COF 18% p.a.