TyN Magazine in exclusive interview with Boris Batine, co-founder and CEO at ID Finance.
TyN Magazine: How do you see the global banking digital transformation process?
Boris Batine: It is necessary to consider the digital transformation of the financial sector as part of the global process. We are witnessing a digital transformation of the economy as a whole: retail and e-commence, logistics, and finance is not an exception.
The economic downturn in the global economy has accelerated the transition to new technologies. Traditional business technologies are being replaced by digital ones, and the development indicators of the digital economy are growing. The digital transformation of the economy is associated with a change in business value, adjustment of technological and managerial processes, the active introduction of digital technologies and a changing approach to human resource management.
Rapid developments in fields such as internet of things (IoT), artificial intelligence, mobile solutions, and others, offer tremendous opportunities for financial services providers. The markets for mobile and contactless payments, P2P services, digital currencies, blockchain and others are growing rapidly. To successfully apply these digital technologies, financial service providers are forced to transform their business models. The alternative is technological obsolescence.
Client-centricity, personalization and mobility are the key components in the concept of a digital bank. To successfully implement these concepts, a digital bank must optimize for customer experience and introduce innovations that support customer loyalty. At the same time, a digital bank must develop at the speed of the changes taking place around it. Most large banks tend to focus digital expertise internally, optimizing unwieldy legacy systems and historically large IT departments.
The larger the banks, the more difficult it is for them to innovate. The pace of innovation can be accelerated through partnerships with startups. To do this, banks often acquire fintech projects and create an ecosystem of startups in order to use their technologies and IP.
The number of digital banks in the world is growing fast. And digital banks that do not even have their own offices and ATMs show the greatest dynamics. They are better able to take into account customer habits, offering special conditions that are unusual in the banking market, as well as additional non-financial services.
One of the main trends in the credit market is intra-bank segmentation. In the near future, we will see the separation of banks into two parts. One of these parts will continue to provide traditional banking services, such as settlement and cash servicing, which will soon become free. The other part will be more technological and will engage in attracting customers, providing a personalized service and segmented products. This is exactly where the potential profits are concentrated.
In general, digitalization has changing the global consumption pattern. Although it made consumption faster, finally technology enabled better service, at the same time digitalization gave consumption some shades of mindfulness. We are only scratching the surface of the global responsible consumption, but the first steps have already been taken.
TyN: What solutions does your company offer for such transformation?
B.B.: ID Finance is an advanced fintech company that operates in the emerging markets of Europe and Latin America. The company uses machine learning and innovative data processing methods to improve consumer access to financial services. All the lending services of the company operate online, providing high financial inclusion and financial mobility to a large population.
We help unbanked and underbanked consumers gain access to credit products and support them in building up their credit histories. We are doing this by innovating across data science, credit scoring, identification systems and fraud prevention. Financial inclusion increases social mobility and this supports GDP growth.
One of the divisions of ID Finance – IDF Lab – is developing platforms that can fully automate the business processes of financial companies. These processes include verification, scoring, risk assessment, fraud prevention and customer retention. The platform applies artificial intelligence and consists of several modules, each of which can work independently. ID Finance uses these solutions in all the countries where we operate. Our proprietary developments have great potential to be exported as B2B solutions, especially in the markets of Europe, Latin America and Southeast Asia.
TyN: What do you consider the most attractive market for your company and why?
B.B.: These are the markets where we currently operate: Spain, Mexico and Brazil.
Let’s take Mexico as an example. This is a huge, underdeveloped market: Mexico has a population of 127 million and 61% of adults has no and never had banking account have, according to the World Bank. These people are cut off from banking. From the other hand, Mexico is a country where more than 50 million people own smartphones, and 70 million people use the internet.
The banking system in Mexico is underdeveloped and has signs of oligopolistic degradation: more than a three out of four customers are unhappy with or indifferent to their banking operator, according to Gallup. Banks here have very low coverage: there are 14 branches per 100,000 residents (in the USA, this figure is 33). At the same time, Mexico is part of the North American free trade zone, which makes the country attractive for investors.
The state understands the need for change in the financial sector: in 2018, Mexico passed a law on financial technology aimed at promoting financial stability and preventing money laundering. This is the first law of its kind in Latin America. It regulates the crypto and crowdfunding markets and introduces innovations such as a regulatory sandbox for fintech companies.
Brazil has a population of 207 million, but as many as 61 million able-bodied residents are cut off from banking services. According to a Deloitte study, Brazil had more fintech startups than any other country in the Latin American region. Combined, these companies raised over $2.1 billion in VC funding in 2019 alone, +23% to the previous year, setting a large new annual record.
São Paulo has become the main investment destination for fintech in Brazil. In order to promote innovative technologies, large banks and corporations are implementing internal incubator programs and are forming industry accelerators. Fintechs and traditional banks are increasingly working in partnership to offer customers innovative solutions.
ID Finance has grown on average more than 100% annually since its inception. We’re profitable in Spain and has achieved operational profitability in Mexico. ID Finance already has over 3.5m+ registered users in Mexico and Brazil. The company onboards around 40k+ new users every week. The company sees huge scope to scale the business further considering the vast €88bn+ market opportunity.
In 2019, ID Finance generated an industry-beating NPS of 78, which is significantly higher than the NPS of any bank in the LatAm region. 90% of the company’s customers apply for repeat loan. Such metrics can help ID Finance achieve another strategic goal – to become the #1 digital finance platform in the Hispanic and LatAm markets.
TyN: Does LATAM consider an expanding Fintech market?
B.B.: No doubt about it! Around half of the 630 million population in LatAm do not have access to banking services. I have already cited a lot of arguments in favor of this thesis. Moreover, to use the example of Brazil alone, there is an estimated revenue pool of $24 billion for fintech companies over the next 10 years. According to Goldman Sachs, the most promising segments are payments, lending and personal finance. McKinsey has estimated that digital financial services could boost the GDP of Brazil by $152 billion by 2025.
TyN: Do you consider what is possible the financial inclusion of the most relegated population? How do you think it can be achieved if your response is positive?
B.B.: Absolutely, but we adhere to the principles of responsible lending. We believe that a loan should be issued only in those cases when it is really necessary, and only to those who can afford it, adequately assess their financial condition and prospects. We firmly believe responsible lending is critical to the long term viability of our business and we act in the interests of our clients, ensuring transparency of lending terms and conditions. We also believe we have a role to play in improving financial literacy of our customers.
E.g. Brazil has a highly uncompetitive banking sector with the five major banks holding a 95% market share. There is poor financial education and limited access to credit with c.40% of the population blacklisted from the traditional banking system, according to Experian. Exorbitant fees and interest rates that are among the highest in the world – 12% per month for overdrafts and 14% per month for credit cards. However, the use of mobile phones already exceeds that of payment cards.
One of the most important goals of ID Finance is to empower the underbanked to become financially included. These factors combine to create an incredible opportunity for us to realize our goal.
The ID Finance team is motivated by the need to help increase financial inclusion. The company is a data-driven decision making machine. Our statistical models take into account thousands of indicators, including information obtained using multi-search technologies, ML and AI, as well as data mining.
The risk assessment system analyzes vast amounts of data, including internal credit history data, data from the anti-fraud service, data from credit bureaus around the world, as well as information from other external sources, such as mobile phone bills.
Another tool for assessing the solvency of the potential borrower is behavior on the company’s website. Last year, ID Finance introduced a system of biometric analysis of human behavior – it is one of the elements of the antifraud scoring system developed by the company.
The behavioral biometrics system tracks the unique typing patterns and other unique behaviors that users demonstrate while filling out their loan application. Such behavioral patterns range from mouse movements to how fingers interact with a keyboard. The biometrics record patterns such as typing speed, typos, flight time between keys, keystroke dynamics, as well as the patterns from actual input.
Thanks to this system, we have issued loans to thousands of people who would most likely be denied borrowing if we hadn’t implemented behavioral biometrics.
The economic impact for the business from introducing this technology is rather big. But the key achievement is that thanks to this system thousands of people received the funding they needed. Without this system, most likely they would have been denied a loan.
It is necessary to open to users the opportunity to use the data about themselves. Data that banks, mobile operators, gadget manufacturers, retailers and internet giants now possess. This will allow companies like ID Finance to better assess the creditworthiness of a borrower, by identifying significant patterns in large data sets. This will help us to finance the needs of those who are left out of the traditional financial system.
TyN: What is your company’s value offer for the financial sector?
B.B.: In general, the ID Finance business model is simple: the company raises funding and then issues loans at a competitive interest rates by leveraging the power of technology. There are very complex technologies at the heart of this model, the major one being a multistage credit scoring. If greatly simplified, then credit scoring works in two directions: it assesses the probability of client’s default and helps to identify fraudsters.
In addition, we grow the number of clients for the traditional banking sector. We develop financially literate and technologically savvy users for a wide range of services, and not just financial ones. Our users create or improve their credit histories using our services. In the future, this gives them access to banking products, including mortgages and car loans.
The ID Finance consumer lending platform underwrites loans using AI and unconventional data to estimate creditworthiness. Anyone with a smartphone and an internet connection can apply for a loan, regardless of their credit history. The process is fast, transparent and hassle-free. Our proprietary IT stack has been developed in-house and uses machine learning techniques, probabilistic methods of risk assessment, multiple search technologies, behavioral biometrics, big data and data mining. ID Finance is one of the few companies around the world that have implemented behavioral biometrics into its operations.
We strive to hire the best staff. These are leading professionals in the fields of IT, software development, risk management, products, analytics and data science. We participate in the work of technological hubs, building an ecosystem of financial technologies.