With over 30 years of experience in scoring and credit management, Gerard Scallan is one of the most senior credit consultants in Europe. He is now coming regularly to Stockholm to deliver training seminars. We sat down with the analytics expert at one of our events, Northchill, and took a deep-dive into everything from consumer banking in the US to how an era of connected devices could change analytics.
You’ve worked with scoring for a long time. Can you tell us a bit about how you got into the business?
Maybe I’ve been in credit too long! I fell into it by accident. I was a student at Stanford in the US and wanted some industry experience. So I took a 2-year sabbatical and joined a company called FICO. More than 30 years later, I’ve never gone back to finish my Ph.D.
FICO were the pioneers of scoring, and I headed their European analytics back in the 1980s. After that, I co-founded Scoreplus with Helen McNab, and have been consulting with credit institutions ever since.
The idea of Scoreplus was to change how people think about analytics in the credit business. We started with the technical end of scoring but expanded from the models to their use in the organization. And tried to change how companies work.
Are there any particular challenges that are recurring for most of your clients?
One of the key challenges is trying to make a company more reactive. Big banks move slowly. In part, it's down to internal reporting and communications lines. If you want to be faster, there are five links in the chain: spot things are changing, figure out why it’s happening, think through what to do about it, get governance (and regulatory) approval, deliver it through IT.
The company’s overall reaction time is the sum of the time in the five links so you must think through the entire process. Competitive advantage is largely up to how responsive you are – and those five links determine whether you’re responsive or not. To be effective in changing things, you have to understand and manage the process.
Why is analytics important in the credit industry and finance as a whole?
Customers are changing, and creditors need to pick up on those changes. No customer today banks with a single institution; everyone has multiple financial relationships. So financial companies must look at the share of wallet. You want the right kind of customer, the right wallet, and you want as big a part of that wallet as possible. That means you must be sensitive to what customers are doing – and how it’s changing.
"Very often we spend lots of time and effort getting information about our customers. By the time it is complete, there is no energy left to interpret and act on it. That’s a recipe for going out of business."
About 20 years ago, a very large American lender did some research about competitive advantage in the credit business. The somewhat surprising conclusion was that all the companies they looked at were using similar analysis techniques. The difference in the most successful companies was rigor in its use and better internal communication. The top managers understood the numbers coming out of the analysis, and they acted on them. Less competitive lenders took what I call a ”cushion approach” to analytic results: they sat on them.
Very often we spend lots of time and effort getting information about our customers. By the time it is complete, there is no energy left to interpret and act on it. That’s a recipe for going out of business. Management (and the whole organization) must use the data - it’s our navigation system.
How do you think the emergence of new payment options, like easy checkouts in E-shops that lets you pay later, has developed people’s relationship to credit?
These services give more people the opportunity to use more credit. 20 years ago someone who earned 20–25 000 SEK a month had extremely limited access to credit. There was little choice and what choices there were did not differ much. For most people, if they got an offer, they could take it or leave it. Now, people have more credit choices. But it’s extremely difficult for them to figure out the pros and cons of the different options.
The idea of a monthly budget is less and less concrete. Because of credit, it is difficult to see if you are over-spending. Credit gives you more flexibility - but some people can’t handle that. So I think lenders need to assess how people understand credit. This is what responsible lending is about. As an industry, and as a national economy, we must not lose touch with it. In many countries, we did lose sight of this in 2008. When you’re in a crazy market, it’s very difficult to stay sane.
What’s your perspective on how consumer banking differs geographically?
The US developed credit faster than Europe did, mostly because of the regulatory environment. But the credit industry in the US has always been very fragmented. The result is, to a certain degree, that the Americans haven’t focused on customer relationships yet. They rather have single products; you have a credit card with one bank, you take a mortgage with another bank, your savings in a third bank and your current account in a fourth bank. There’s not an ecosystem linking all the products together.
"When niche financial companies go head-to-head with relationship banks, the niche companies are faster on their feet and more focused. That’s how they capture market share."
Historically, the European model has been based on relationship banking. As a customer, I can go to the bank and it “knows me”. The bank sees the money that goes into my current account each month, how I spend it. In principle, my relationship bank should be able to give me such good offers that no one else can match them. In practice, that isn’t always the case, because of bureaucratic structures within the lenders.
When niche financial companies go head-to-head with relationship banks, the niche companies are faster on their feet and more focused. That’s how they capture market share.
Is the conclusion then that these niche banks will take over, but create a more fragmented market?
Not completely. There are advantages to larger network banks. They have the scale, they have the expertise and they have a range of products - so they can spread their costs over a wider customer relationship. They also have extremely rich information about a customer, because they’ve been in the market for years and know how consumers will behave. They see all the financial transactions that go through the customer’s accounts each month - so they should be able to see when things change.
For a standalone, selling just one product, it’s much harder to have that information. The competitive advantage of a relationship bank is quite big in countries like Denmark, where there is little publicly available credit information. New players don’t know how to predict consumer behavior. This competitive advantage is less in Sweden, where the information held by the credit bureaus is richer. So the market is more open - but making sure that lenders are prudent becomes more complicated.
What do you think is special about Northmill?
I think it’s the integration between IT and the banking side. It’s the close integration between the platforms and the banking products. Then I think how you’re aiming to get more personalised relationship banking with Rebilla is really interesting.
Of course, you're also growing very fast, which is really exciting. And the growth of the company is a challenge in all kinds of areas. Growing from a chrysalis into a butterfly and taking off is tough, and demands a cultural change. It’s not just a change in infrastructure. Changes in the infrastructure induce changes in the way the company works, and that’s the hill that you have to climb.
Would you say that there are more modern scoring factors that we could use to develop faster?
Yes, I think we will get more data - social media, mobile phone, better analysis of customer transactions for instance. But you have to worry about the quality of the new data and of the data that we’re working with all the time.
For instance, there’s a lot of hype about social media data. But the problem is if everybody figures out that their Facebook data is going to be used to determine their credit quality, everybody would start to manipulate it.
"We must worry about the integrity of the data we are using, and how to maintain that integrity over time."
This already exists in the US - not on social media but on credit bureau data. If you search Google for ”credit score training”, you’ll find lots of companies that suggest how consumers can manipulate their credit and try to make their scores look better. So it’s a kind of ”personalized” fake news - creating a credit history that gives a misleading picture of the real credit capacity of the consumer.
So, we must worry about the integrity of the data we are using, and how to maintain that integrity over time.
From an industry perspective, we’re seeing that mobile banking is becoming bigger, which allows you to get to know the customer in a different way. How will that affect how we get to know the customers?
I think it’ll change, but it will take a lot of work from the banks. The raw data alone will not change anything. We must take that data and structure it. For instance, we now know where the customer is when he or she makes a transaction. That’s not something that we have built into our organisational logic yet. So what does that tell us? Some customers are very volatile; other customers have very fixed habits. Right now, we are not good at distinguishing between them. So if a frequent traveler makes a cash withdrawal in Shanghai, we should not be worried. But if a person with very fixed habits uses an ATM on the other side of town, maybe we should ask why.
It sounds like even for these new, niche companies, it’s really about putting it together with a complete, attractive relationship platform that can use this data in innovative ways.
Yes, people now have multiple financial companies that they are dealing with. So their first question is who they should turn to; is it going to be Northmill, or a traditional relationship bank, or someone else? And you’re going to get them by offering right levels of customer service.
McKinsey did some research in the US years ago and asked people who’ve changed banks why they switched. 70 percent responded poor customer service. If we can do something as simple as being available when they want to talk to us, give shorter waiting times on phones, we can contribute to the customer experience. We won’t take over the market this way, but niche financial companies can compete more effectively for share of wallet. It will certainly be interesting to see who has our wallets a few years from now.