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This week, we invited Charles H. Green to offer his perspectives on the online marketplace lending sector. Charles is Managing Director of Small Business Finance Institute, which provides professional training to commercial lenders for banks and nonbanks. He has written extensively about the marketplace lending sector, including the recent Banker’s Guide to New Small Business Finance (John Wiley & Sons, 2014). Earlier in his career, he founded and served as President/CEO of Sunrise Bank of Atlanta. The evolution of commercial lending over the past seven years has certainly had its share of ups and downs. Remember the ominous days leading up to the financial crisis when it seemed like everything was teetering on collapse? In the end, and more than five hundred bank failures later, the economy found a very slow path back to growth. During that uncertain time, commercial lenders took a lot of criticism from several directions. Regulators were skeptical of the risk level that lenders accepted, borrowers argued when their credit score did not qualify them for a loan and seemingly everyone else had an opinion on how long it took to turn lending volumes around. On top of those worries, a new channel emerged, “online marketplace lending.” These new lenders funded loans from technology platforms that turned around loan applications in very short order, seeming to best banks at their own game. Fast forward several years, and traditional lending has had plenty to cheer about, even if not recognized in the broader economy. The bank failures largely have been resolved, making some of the healthy surviving banks much larger and eliminating some competitors in many markets. Additionally, bank profits are back up as balance sheets have been mostly cleared of underperforming credits, with a renewed focus on good underwriting and solid risk management. Banks Have Advantages This new phenomenon known as online marketplace lending has grown dramatically on the strength of loans that traditional banks have had difficulty serving in the past: small, unsecured working capital loans to service and retail businesses. By performing the sorely needed task of scaling smaller business loans, online marketplace lenders have strengthened many small companies that were otherwise unable to secure financing from banks. However, banks never lost their core strength: their customers. While deregulation gave rise to competitors from a long list of bank services and products, few small-business owners left their banks behind entirely. During the crisis, many companies flocked back to the safety of the federally insured deposit system. Online marketplace lenders may augment but never replace those kinds of relationships. Another advantage large banks have is a strong tie with local businesses. While online lenders can respond quickly to application requests with the latest digital efficiency, their capacity to forge direct relationships is often limited to the term of their outstanding loan. Once repaid, they must restart the cycle to convince clients to borrow again. Banks, on the other hand, offer dozens of products and services that can help small business owners manage everything from business finances, household purchases, retirement savings, auto loans, safe deposit boxes, etc. Most online lenders offer a shorter product list, with options intended to serve a specific customer demographic. Perhaps the most significant advantage banks carry is their degree of flexibility. While online marketplace lenders can leverage the many benefits of a digital platform, there is often only one way to apply for a loan. Many online lenders lose business when an applicant falls outside their parameters. Finally, banks offer flexibility to negotiate around certain conditions or requirements that may bear consideration of alteration. There are people at various levels who can waive some rules or make exceptions when warranted. Given their similarities (looking for business among the same customer prospects) and differences (average loan size, structure and underwriting), banks and online marketplace lenders have the perfect opportunity to forge cooperative arrangements to exchange business. Imagine there is a bank president with a 50 percent loan-to-deposit ratio who is starved for a larger book of earning assets. Perhaps he needs assets from some areas that came up weak in his Community Reinvestment Act (CRA) examination? Maybe his loan product mix is too heavily reliant on big Commercial Real Estate (CRE) loans, but he struggles to book small credits profitably due to the boarding cost? What if he could go to a trusted online marketplace dashboard and search for loans to buy based on a transparent credit grading matrix, with adequate returns commensurate with the risk? Maybe he could even target specific ZIP™ codes to invest funds in places he is lacking market presence. Small-business loans, consumer loans, student loans — they’re all there, and more lines are on the way. Online lenders are nonbank entities that finance much in the same way as banks. A considerable portion of their capital must be invested in their proprietary digital capacity, so when lending grows, many are scrambling for funding. Most of them fund this volume with either revolving lines of credit, securitization or by selling off loans/portfolios to investors. The interesting part is that nothing should stop a commercial bank from participating in any of these activities. There are plenty of opportunities for banks to engage with the marketplace for profitable results with manageable risk. Banks can buy portfolios or loans, refer loan applicants, use the online lender’s proprietary technology to underwrite and fund certain loans, or participate with lender finance, which has been a common practice for alternative lenders for decades. Each type of financial institution has its own inherent advantages. However, playing to the strengths of the online marketplace and banks alike enables both types of entities to open new pockets of opportunity — a situation that may lead to a faster path for economic growth. Related articles Just how alternative are today’s online marketplace lenders? How online marketplace lenders are changing the rules of small-business finance Self-Regulatory Program for Nonbank Small Business Lenders Top regulatory priorities for commercial lenders Playing to Your Strength - Opportunities for Regional Banks to Build Better Lending Portfolios Game Changer - How Marketplace Platforms Are Bringing Financial Institutions Back to Small-Business Lending Marketplace Matchmakers - How Loan Aggregators Bring Borrowers and Lenders Together New Frontiers - What's Next For Marketplace Lending?

Online lenders represent a valuable resource for small businesses in need of working capital. Also known as "alternative" lenders, they are particularly useful to new businesses lacking the long, detailed credit history that banks and traditional lenders usually require to underwrite a commercial loan. This is why online lenders have become so popular with newer restaurants, small retailers, young business service companies and other enterprises that have no other place to go for working capital. Being unregulated, online lenders can be far more lenient with their lending requirements. However, online lenders don’t lend blindly. They don’t base their decisions on a catchy name and an inspiring mission statement.  Online lenders have numerous sources of data upon which to base their decisions; as you might imagine, many of these sources are as "non-traditional" as the lenders themselves. For example, there are many names people use to describe the new types of data online lenders use to qualify applicants, such as “Big Data,” “alternative data” and “online data.” Essentially, they all mean the same thing: Readily available information that can be used to determine a business' financial health above and beyond traditional credit scores. New Data Sources for Online Lenders In addition to checking accounts and tax returns, online lenders may use any number of alternative sources of data to evaluate potential borrowers, including: Social Media. What customers say about a business on various social sites offer more important clues as to a business' health. A business with high ratings from a large number of customers may be a good risk, even if it's only been in business for one or two years. Online Financial Activity. Heavy activity on sites like PayPal or Ebay can suggest a healthy cash flow, something that's important to many online lenders. Permissioned access to business checking account information also allows lenders to better assess cash flow. Accounting Software. Having direct access to a borrower's accounting software (e.g. QuickBooks, FreshBooks) allows a potential lender to observe and track a borrower's financial activity in real time. Such data can also provide a lender with an early warning signal should the borrower suddenly get into trouble. Shipping Data. If a borrower is a retailer, whether B2B or B2C, are its products moving? Shipping data -- both volume and frequency -- is another valuable indicator of financial stability. Privacy & Security Issues How do online lenders capture this data, particularly the proprietary information not readily available through a Google search or social media? They get it straight from the borrower. When a business owner agrees to an online loan, they're often agreeing to provide the lender direct access to their business checking, accounting and management system. And sometimes not just for a one-time look, either. This may involve long-term access so the lender can keep an eye on its investment. The downside to this arrangement is, of course, privacy and security vulnerabilities. The upside is that it may help expedite future borrowing. Interpretation is Critical Of course, data by itself does not tell the whole story; it must be properly interpreted. This is particularly true of alternative data. For example, the ratings a restaurant receives on social media can't be judged against ratings for a dry cleaner. A restaurant in any city is likely to get far more social media coverage than is a neighborhood dry cleaner. However, a dry cleaner with just two or three reviews may be a far better business risk than a restaurant with 10. It's all about being able to interpret, normalize and glean insights from the data you collect. Packaging Online Data for Risk Assessment Five years ago, Experian created its Global Data Laboratory in San Diego for the express purpose of mining alternative data and seeing if it could be packaged as a commercial product to help online lenders and other companies evaluate new, small companies. Staffed with a team of Ph.D.’s in data science, the lab has built a one thousand (1,000) terabyte database containing information from thousands of sources. "One of the big challenges any lender faces is determining if a borrower is legitimate. This is true even for traditional businesses, like a Home Depot that may want to open a credit line with a small contractor that has little or no credit history. For every 100 companies that are 'invisible' to lenders, we can now establish the legitimacy of 20 businesses using nothing but online sources. That means a business can now have as much as 20 percent more customers than before just by accessing this alternative data. The lab's new algorithms are also highly predictive of a company's longevity.” Eric Haller EVP Experian Data Labs For new and emerging businesses, leveraging data from the Web can deliver a 40 percent lift in predictive performance compared to the industry averages for predicting whether a company will go out of business or not. Just Part of the Equation As useful as alternative data is, it’s just part of the algorithm an online lender uses to score borrowers. Traditional credit scores are usually still part of the evaluation process.  When available, nothing predicts credit risk better than credit history. Even the most sophisticated online lenders are still going to look at trade experience, business registrations and other third-party information. Alternative data sources become just one part of the equation. New sources of customer information and readily available online data, combined with traditional data and metrics – and the experience necessary to properly interpret both – has created a robust online financial marketplace and gives small business owners unparalleled access, flexibility and choice when it comes to capital financing. While it's still a bit like the Wild West, the world of online lending continues to grow robustly. Through the use of Big Data, Experian is able to provide insights that help minimize risks for borrowers and lenders alike. That helps everyone. Related articles Just how alternative are today’s online marketplace lenders? How online marketplace lenders are changing the rules of small-business finance Self-Regulatory Program for Nonbank Small Business Lenders Top regulatory priorities for commercial lenders Playing to Your Strength - Opportunities for Regional Banks to Build Better Lending Portfolios Game Changer - How Marketplace Platforms Are Bringing Financial Institutions Back to Small-Business Lending Marketplace Matchmakers - How Loan Aggregators Bring Borrowers and Lenders Together New Frontiers - What's Next For Marketplace Lending?

This week, we invited Charles H. Green to offer his perspectives on the online marketplace lending sector. The following article is his contribution to our series on marketplace lending. The phrase “man bites dog” is an aphorism in journalism that describes how an unusual, infrequent event (such as a man biting a dog) is more likely to be reported as news than an ordinary occurrence with similar consequences, such as a dog biting a man. In other words, an event is considered more newsworthy if there is something unusual about it. Thus, the headline above likely will draw more attention than the same story with the headline “Hedge fund offers to refinance consumer loans for 7 percent APR.” While both parties might actually own a portion of the same loan portfolio in today’s “sharing economy,” known in financial services as “peer-to-peer lending,” this kind of loan is one of many that have evolved on the Internet under the new financial industry sector labeled “marketplace lending.” Online marketplace lenders, funders, and investors have caused quite a stir over the past couple of years by offering alternative financing products and platforms to serve consumers and businesses that may have trouble securing a loan from traditional financial services, i.e., banks. But what’s so radically different about what they do, other than using a Website rather than a drive-up branch to initiate a financial relationship? After all, don’t both extend money to another party with strings attached — that is, conditions about who gets the money, how much and when they promise to repay it, as well as the consequences if they don’t? It seems like a better “alternative” would be to simply win the lottery! In fact, there is plenty of “alternative” in alternative lending, and in a relatively short period of time, the results have been phenomenal for consumers and businesses alike. What’s so different? For starters, the submission process for loan applications varies greatly. Due to supervisory oversight of the industry and a conservative lending culture, applying for a bank loan often means that a more complete disclosure of personal and business information is required. The aftereffects of the Great Recession and housing bubble meant that many banks curtailed most lending altogether until their balance sheets recovered, On the flip side, online lenders process applications with very little information —generally about 40 data points. This is because these lenders leverage the information and often ask for a borrower’s authorization to gain access to the cloud, where they can acquire more data on a borrower. Furthermore, online lenders have a narrow focus on where they are willing to lend money, so their decision analytics focus more precisely on a smaller set of information that really determines the risk for that particular type of loan. This leads us to how online lenders make credit decisions. Most use proprietary algorithms that weigh various data collected from a borrower’s application and reach a decision based on the numerical score produced at that time. There’s little human intervention to sway the verdict positively or negatively since the decision matrix was developed by testing millions of blind data files with historical loan outcomes to measure and manage their exposure to credit loss. There are plenty more differences in the online lenders’ approach, but probably none more important than the customer experience. Online loan applications can be submitted 24-7, and a borrower will be “conditionally qualified” or declined usually within minutes. Final credit approval often comes within a couple of hours, and funding might be in 48 to 72 hours. How can they do it? The answer lies primarily within four factors: 1) These companies are driven by innovation, with technology used to address many aspects that we don’t like about traditional lending; 2) Online lenders are not banks, and as such, they are relatively free of the regulation that comes with accepting public deposits to fund their operations; and 3) By focusing on a smaller niche of prospective borrowers, online lenders don’t try to be everything to everybody but rather specialize to serve a smaller set of clients better. 4) These companies have developed niche products to satisfy the particular needs of each market. What happens next? Is the end of commercial banks as we know them at hand? No. While the rise of online marketplace lending has been meteoric and the industry climbed to an admirable $9 billion of funding in 2014, it is a very small portion of the trillions of dollars funded by traditional banking today. Still, what they do is attract plenty of attention in the trade. Expect to hear more about strategic partnerships, acquisitions, and other flattering forms of imitation, as the banking industry will adopt and adapt many of the inspiring improvements brought by the online marketplace lending sector. Both sides will win, but the real prize goes to consumers and small-business owners who will have a more robust and competitive environment to get financing capital in the years ahead. About Charles H. Green Charles is Managing Director of Small Business Finance Institute, which provides professional training to commercial lenders for banks and nonbanks. He has written extensively about the marketplace lending sector, including the recent Banker’s Guide to New Small Business Finance (John Wiley & Sons, 2014). Earlier in his career, he founded and served as President/CEO of Sunrise Bank of Atlanta. Related articles Just how alternative are today’s online marketplace lenders? How online marketplace lenders are changing the rules of small-business finance Self-Regulatory Program for Nonbank Small Business Lenders Top regulatory priorities for commercial lenders Playing to Your Strength - Opportunities for Regional Banks to Build Better Lending Portfolios Game Changer - How Marketplace Platforms Are Bringing Financial Institutions Back to Small-Business Lending Marketplace Matchmakers - How Loan Aggregators Bring Borrowers and Lenders Together New Frontiers - What's Next For Marketplace Lending?

Disruptive technology has radically changed how we shop, socialize, book vacation rentals — and even how we hail a cab. Now we have another Web-based disrupter upending yet one more venerable American institution: how we secure small-business loans. Over the past two to three years, online marketplace lending (OML) — also called alternative lending — has made dramatic changes in the landscape of financing businesses. Companies like OnDeck, Kabbage, Funding Circle, CanCapital, Lending Club and dozens of others have created what amounts to a $1 trillion market, according to a recent article on TechCrunch. This doesn’t mean that OML is going to send traditional banks the way of typewriter and buggy whip makers. Your neighborhood bank branch and small-business lender still do and will have an important function to perform. But strict regulation and rigid business models within the traditional lending industry have left major gaps when it comes to funding activity in the small-business marketplace. It is in these voids that creative and aggressive entrepreneurs are finding not only amazing business opportunities, but also an entire class of customer that until now has been grossly underserved. What is online marketplace lending all about? How does it work? Why is it so attractive? Who are the customers? And why now? The answers to all these questions lie in one of those serendipitous confluences of economic necessity, technological advancement and entrepreneurial creativity that creates a paradigm shift in what we believe is possible. The result is a new model for commercial financing that may soon become the primary medium many small to medium-size companies use to secure the capital they need to grow and prosper. Over the next eight weeks, Experian® will deep dive into the State of Online Marketplace Lending, examining the lending market from all sides, piecing it together with opinions from thought leaders throughout the space and publishing our findings in a compendium ebook. Let’s begin by tracing this trend to its source. The roots of online marketplace lending It is said that the Chinese character for disaster is the same as that for opportunity. If so, then it makes sense that the disastrous Great Recession of 2008 to 2010 should serve as the crucible from which the alternative lending industry should spring. When the economy crashed in 2008, the Western financial industry responded by replacing its overly lax lending requirements with regulations and lending standards so strict that many businesses, especially younger or smaller ones, found it all but impossible to secure financing under any conditions. Having been burned by their formerly liberal attitudes, banks and other traditional lenders decided the best way to minimize risk was to avoid lending to all but their most financially secure customers. (In other words, the only way to get a loan was to prove you didn’t need one.) Enter the online marketplace lenders. OMLs — particularly peer-to-peer lenders — began to appear a year or so before the market crashed. The rise of Facebook and similar social media platforms coupled with rapid advances in Big Data management allowed those with capital to quickly qualify potential customers via the Internet and issue short-term loans without the red tape and regulations that made borrowing from banks such a challenge. "Technology is what has made online lending possible, online lenders benefit from having a much lower cost basis than banks. As a result, they can price their loans differently. And they can often make their lending decisions on the same day they receive an application.” Laura DeSoto Senior V.P. Strategic Initiatives   Once the Great Recession hit in force, small and medium-size businesses, finding that traditional capital sources had dried up like Lake Shasta in the California drought, flocked to these aggressive start-ups en masse. OML marketing messages soon became ubiquitous, ranging from 30-second radio spots to robocalls to business owners’ cell phones. Web-based payment services like PayPal began to offer their own business capital lending programs. To the surprise of the cynics, many of the new lending platforms actually worked. Businesses were able to borrow the funds they needed. Lenders enjoyed solid returns on their investments. And consumers reaped the benefits of an economy offering a broader range of goods and services. Today, OML looks like it’s here to stay — which is not to say that banks have reason to panic. “It’s important to note that many online lenders actually get their funds from traditional banks,” DeSoto stated. “Some people call OMLs ‘shadow banks’ because they’re able to use banks’ funds in ways that are not subject to all the same federal regulations.” What makes online lending “alternative” It is not just the source of the loans that distinguishes alternative lending from traditional commercial banking. The method, speed, qualifications and form of the loans themselves are also distinctive. As the name implies, online lending is done via the Internet. Borrowers need not walk into a brick-and-mortar bank to fill out reams of mind-numbing paperwork. Instead, they need only fill out a usually brief online application and attach whatever documentation the lender requires. What kind of documentation? Often, alternative lenders don’t require the detailed financial statements and tax returns commercial banks demand. Instead, a month or two of retail receipts may be all that’s necessary. This is because many alternative loans are not the long-term, interest-based instruments to which we’re accustomed. Instead, many alternative lenders use “factoring” or revenue-based lending in which they take a small portion of each sale as repayment on the loan. Steady cash flow is more important than yearly sales volume or annual profits/losses. Another popular vehicle is so-called “peer-to-peer” lending that often involves small loans of $5,000 to $50,000 with terms of just one to five years. And now that online lending has become legitimate in the eyes of many, we’re seeing loans or “working capital advances” in the millions of dollars. Like the most sophisticated banks, many OMLs — even some of the smaller ones — have access to advanced algorithms that allow them to evaluate a potential borrower’s suitability based on readily available business credit data in addition to cash flow, and activity data. But because their systems are mostly or even totally automated, OMLs can prequalify applicants in a matter of hours, if not minutes. Following prequalification, additional documentation may still be necessary before a loan is approved. Of course, the larger the loan, the more documentation lenders require. Online lending reduces paperwork, but it doesn’t eliminate it altogether. “Some companies still rely partly on manual application reviews. Some even promote their ‘live’ customer service,” DeSoto noted. “Still, it probably won’t be long before most online lending is 100 percent automated.” Are you a candidate for online marketplace lending? The ideal candidate for today’s online marketplace lending is a small to medium-size retail or commercial B2B company with a steady cash flow and a need for small, quick cash infusions to buy new capital equipment, hire new personnel or otherwise expand operations. Restaurants, retail stores, and B2B service companies like office equipment suppliers and marketing/ad agencies fit this profile perfectly. Because cash flow is essential, most marketplace lenders are not interested in financing start-ups. These are still the purview of venture capitalists. Most online lenders also are not interested in manufacturing companies that make perhaps one or two large sales every couple of months. Expanding the market, not cannibalizing it DeSoto stressed that online lenders are not taking business away from traditional lenders but are serving customers who probably would not qualify for traditional business loans. As such, they’re expanding the market, not cannibalizing it. “Most small businesses that have been in business just one or two years wouldn’t even be on a commercial bank’s radar,” she noted. “These people would otherwise have to rely on friends, family or personal credit for funds. Online lending offers opportunities that simply did not previously exist.” The role of business credit information The role of business credit information — including any history of missed payments, delinquencies, pending judgments, bankruptcies and overextended lines of credit — is obviously critical to marketplace lenders’ ability to quickly and accurately assess risk and advance capital responsibly. “Experian, the industry leader in consumer and business credit reporting, is proud of the part we play in making marketplace financing available to thousands of businesses nationwide and of the good this new and growing industry sector is doing to expand the economy” Laura  DeSoto concluded. So in summary, a few key points about online marketplace lending: Online applications usually are fast and simple and require minimal documentation Technology allows lenders to prequalify borrowers in hours, sometimes minutes Loans can be as low as a few thousand dollars or as high as several million dollars Most lenders eschew traditional long-term interest rates in favor of cash flow or other short-term repayments Prime customers are small, younger retail or services businesses with high, consistent cash flow Online lending is expanding the market, creating opportunities where none existed previously In future articles, we will dive even deeper into the world of alternative and online lending, identifying the major players, looking closer at the risks and benefits, and predicting as best we can where the industry is headed. Next week, Charles H. Green from AdviceOnLoan will join us to examine how different yet similar online marketplace lending is to traditional lending.   Related articles Just how alternative are today’s online marketplace lenders? How online marketplace lenders are changing the rules of small-business finance Self-Regulatory Program for Nonbank Small Business Lenders Top regulatory priorities for commercial lenders Playing to Your Strength - Opportunities for Regional Banks to Build Better Lending Portfolios Game Changer - How Marketplace Platforms Are Bringing Financial Institutions Back to Small-Business Lending Marketplace Matchmakers - How Loan Aggregators Bring Borrowers and Lenders Together New Frontiers - What's Next For Marketplace Lending?  

Originally designed as a cloud-based alternative to expensive software that was not flexible, Salesforce.com has become the platform of choice for many companies. To take full advantage of the many capabilities Salesforce provides and to avoid re-creating department silos that exist with most CRM/ERP platforms, more operational business groups are moving to Salesforce to take advantage of built-in features such as 360-degree prospect and account views, workflow, approval queues and tasks. Until now though, credit departments have typically operated in their own silo, accessing customer credit information through proprietary credit and risk management systems. At Experian, we are seeing an increasing need by finance and credit departments to be able to request, review and store our commercial data within Salesforce and quickly respond to credit requests from prospects as well as perform periodic account reviews of existing customers. To solve this disconnect, we have created Experian FusionIQ™, a new Salesforce.com Lightning-compatible app that enables B2B organizations to easily integrate Experian business and commercial credit information into their Salesforce.com CRM instance. With Experian FusionIQ™, we enable credit departments to make better credit decisions while increasing efficiency through easy access to our data. Salesforce.com no longer just for the sales department According to a recent study of financial services companies looking to deploy Salesforce.com, sixty four percent of respondents anticipated productivity gains; fifty percent expected a boost to enhanced cross-functional collaboration; fifty four percent anticipated increased visibility to customer information and thirty eight percent expected improved customer experience. Financial services companies are transitioning from utilizing Salesforce solely as a sales application to leveraging it as a platform for delivering customer engagement. Here are some of the things you can do with Experian FusionIQ™: Get a 360-degree view of all your customer accounts Payment history, public records and credit ratings are key factors when determining whether to pursue new customers or grow existing accounts. The Experian FusionIQ™ app allows you to centralize this critical information within the Salesforce.com environment, giving full transparency to key stakeholders within your organization. Your sales, finance, credit and other internal departments now can work together to optimize resources and prioritize accounts. When the Sales Department can't easily share information with the Credit and Finance departments, the approval process slows down, opportunities are lost, and customers aren’t retained. The Experian® FusionIQ™ app seamlessly adds the business risk data all your key internal stakeholders need within your Salesforce.com environment. Reports, Scoring, Alerts and Decisioning features are available to everyone on your platform, allowing them to make key review decisions in real-time. Create more proactive account-management workflows What is your process for monitoring significant changes in your accounts? The Experian FusionIQ™ app provides instant notification of late payments, defaults, bankruptcies and other changes in your customer and prospect accounts right within your Salesforce.com environment. Migrate your existing BusinessIQ℠ services into Salesforce.com Are you already using Experian’s BusinessIQ℠ to track your accounts’ credit statuses? The Experian FusionIQ™ app allows you to migrate the BusinessIQ services you’re already using into Salesforce.com easily to eliminate bottlenecks and accelerate decision making. Virtually no IT resources required The Experian FusionIQ™ app is designed to integrate automatically with your existing Salesforce.com platform with virtually no additional coding required. Out-of-the-box features give you access to reports, alerts and decisioning. Configure existing Salesforce.com features such as workflow, notifications and reporting to streamline your credit process. FusionIQ for Salesforce.com Lightning Demo  

Credit departments have long performed the important role of assessing and monitoring the health of new and existing customer accounts. However, in the wake of the Great Recession and the ensuing slow economic recovery, the need to evaluate the health of supply chain partners has become even more important. In my role here at Experian, I talk to people every day in credit and supply chain management, and I’ve found striking similarities in the roles of both groups. First, each group has an interest in understanding risk when establishing new relationships, whether it be assessing the credit risk of a new customer or determining the financial stability of a critical vendor. Second, both have a shared interest in monitoring the financial health of both customers and vendors (although it could be argued that the potential disruption associated with the loss of a key vendor might carry a much higher impact for a supply chain manager than having to collect on or even charge off a customer account would for someone in credit management.) For example, a major battery supplier for one of the leading electronic vehicle manufacturers ran into financial trouble recently, and it caused all kinds of headaches. The stock price , sales and customers all suffered. The battery company was the sole supplier to this vehicle manufacturer. With proactive credit monitoring, the vehicle manufacturer may have been able to spot signs that the vendor’s financial stability was beginning to deteriorate, and the headaches could’ve been avoided. Thankfully things worked out in the end (the vehicle manufacturer went into the battery production business.) All in the family Business family relationships are also important in credit and supply chain management. Credit professionals would be interested in Corporate Linkage because they really want to know how to manage a particular customer. Understanding if an account is a subsidiary of a parent company that they have an existing relationship with is vital, as it can affect potential opportunities or responsive strategies if they are delinquent. These insights can help make a more informed decision. For example, a credit manager may think twice about aggressively pursuing an account that may even be moderately delinquent if they realize that they also have a sizable relationship with the account’s parent company. By contrast, they might take a firmer approach with a smaller customer who is behind on their payments, but represents a significantly smaller overall spend. On the supply chain side, visibility into the structure of a parent company is also important, because if the parent company runs into financial trouble it’s likely to cause a domino effect that could quickly steamroll into a supply chain crisis. Understanding and monitoring a supplier’s corporate family relationships enables managers to ensure that they truly have adequate supply chain redundancy. As much as Corporate Linkage informs relationship management in credit accounts, it can help the supply chain manager understand how their spend contributes to the suppliers bottom line, creating additional opportunities for spend management. A supply chain manager that knows they are doing business with three subsidiaries of the same company puts them into a much stronger negotiating position when it comes to volume discounts than if they were viewing the businesses as separate suppliers. Industry Groups Focusing Attention One example of an organization paying attention to the converging credit and supply chain management methodologies is Burbank, California-based Credit Management Association, who recently established a Supplier Risk Management Group. Group Facilitator Larry Convoy agrees that credit management is critical to the health of the supply chain saying recently “During my time in credit management, I’ve often heard the following: ‘We can survive if a customer relationship goes bad, but we cannot survive if one of our primary or secondary vendors has an interruption in delivering product, raw materials or services to us.’ For that reason, we invest an equal amount of resources investigating our vendors. We've created an industry credit group based around this idea for our members, as these relationships can make or break their businesses.” Reducing Friction, Increasing Efficiency To take it a step further, credit professionals and supply chain managers are focused on reducing cost and friction, while increasing efficiencies. A client recently said that it takes 15 minutes for an analyst to review the paperwork they require of a new account that does not pass automated vetting, but on average it takes 10 days for the analyst to get the required documentation from the applicant. In some cases, businesses are limited to working with suppliers that are located within their geographical area for logistical reasons. These companies walk a fine line between operational efficiencies and assuming the right amount of risk. If the risk assessment process is too intrusive, the supplier may walk away. Asking for additional information and delays in establishing the account may put a strain on the relationship at the outset, so using third-party data sources in the risk assessment process can help enhance efficiencies and reduce exposure while maintaining a positive supplier relationship. Delinquency vs. Default One difference between credit management and supply chain is that credit departments are typically concerned with predicting customer delinquency and cash flow, while supply chain management tends to be more focused on assessing the risk of supplier default. However, if a supplier plays a critical role in the supply chain, or is not easily replaced, monitoring the supplier’s financial health is vital. It may be the difference between having to shore up a key supplier financially if there begins to be signs of increasingly delinquent payment versus having the supply chain come to a screeching halt if the supplier suddenly fails. Risk Management Trends Many credit management professionals in financial institutions used macro-economic data during the Great Recession to identify potential regional credit trends that could impact the health of their portfolios. This approach may also be valuable to supply chain managers who want to keep regional economic downturns from disrupting their supply chain. It’s smart to assess not just the supplier’s credit, but also how regional credit trends in the supplier’s area may impact the supplier’s financial health. For example, according to Experian , four of the top five metro areas for bankruptcies in the transportation industry are in California. If a company relies heavily on a transportation company in California and that supplier is somewhat dependent on their local market for their ongoing financial wellbeing, it might be wise to have additional transportation suppliers who can provide similar services, but who are headquartered in less economically volatile areas of the country. At the end of the day, there are far more commonalities than differences between credit and supply chain management. Utilizing proven credit risk management tools, and the data that powers them can help reduce weak links in the supply chain and help steer clear of unpleasant surprises. To learn more about Experian risk management solutions contact us at https://www.experian.com/b2b or call 877 565 8153.  

Ten years ago movie night at our house would usually include a run to the video store where we would pick out a selection from the New Arrivals section, some candy, perhaps some popcorn and we would have our fingers crossed the selection was a good one. Nowadays it’s not uncommon to find us binge watching streamed episodes of “House of Cards” or “Mad Men on weekends.” What’s even more gratifying is after watching “House of Cards” unprompted, Netflix now recommends “The Newsroom” and other shows we invariably like. How do they know we would like these shows? This is predictive marketing at work, driven by big data. Netflix has developed sophisticated propensity models around each member’s viewing habits, and the net result is a better viewing experience with the service. We make amazing entertainment discoveries every week. In business marketing propensity models will determine which prospects or customers are likely to respond to a particular offer. For example, the marketing department of a large financial institution seeking to expand their commercial small business loan portfolio, might want to segment and target commercial lending offers to a concentration of customers most likely to accept a particular offer. When applied in business, propensity models can unlock opportunities for increased profit, share of wallet and deeper engagement with prospects and customers. At Experian, in a typical propensity modeling engagement we will first meet with our customers to understand their goals and objectives. We talk first about pre-screen criteria that enable us to screen out prospects that would not fit into the criteria. A sporting equipment manufacturer would probably not sell to companies in the mining or agriculture industries, so we weed out the ones least likely to lead to a successful conversion. Our data scientists and statisticians get to work on large data sets and evaluate a number of factors. Experian will then develop a customized response model that will identify significant characteristics of responders vs. non responders and therefore will maximally differentiate responders from non responders. Since (holding other factors constant) a higher response rate is preferred, a response model can help lower the cost per response. The response model will generate a “score” that can be used to rank order the prospects base in terms of response likelihood. The response model can be used in two different ways to achieve maximum effectiveness. It can be used to optimize the number of responders for a given sized solicitation, or it may be used to minimize the number of solicitations in order to achieve a budgeted number of responders. A high response score will indicate someone who is likely to respond, as is shown graphically in Exhibits 1 and 2. This work results in a model of the ideal target to which an offer would most likely resonate with. This is called a lookalike. The marketing department at our large financial institution might start off with a large list of potential candidates to send the offer via direct mail, 1 million for example. But mailing an offer to that many people may be cost prohibitive. A propensity model can identify prospects most likely to accept the offer, so your direct mail campaign is more targeted, thereby increasing ROI. A highly targeted mailing to your ideal targets is a safer bet, and would make for a much more predictable outcome. The marketer can feel more confident mailing an offer to lookalike prospects because the chances of successful conversion are that much higher. That’s the case for Woodland Hills based ForwardLine, who have been providing alternative short-term financing to small businesses since 2003. Working with Experian Decision Analytics, ForwardLine did an analysis of their direct marketing program and determined that 22 percent of direct mail was generating 68 percent of their underwriting approvals, exposing a significant gap in wasted marketing funds. The Experian Decision Analytics team developed a custom model which enabled ForwardLine to algorithmically target lookalike prospects with a higher propensity to convert into a successful loan engagement. Michael Carlson, V.P Marketing, ForwardLine ForwardLine Vice President of Marketing, Michael Carlson is thrilled with the initial results. “Working with Experian we were not only able to improve performance, but we are able to reduce our marketing spend, while achieving the same results. We have taken our direct marketing effort from a small program that was profitable, but not meaningful in terms of generating significant volume, to working with Experian to achieve remarkable results. It’s largely why we enjoyed 20 percent growth this year.”     Best in Industry Credit Attributes Experian clients use our archived Biz AttributesSM along with collection specific data elements as independent variables for propensity model development. Experian’s Biz AttributesSM are a set of commercial bureau attribute definitions (includes several key demographic attributes as well) which are accurately developed off Experian’s Commercial BizSourceSM credit bureau. When used for response model development, Biz AttributesSM provides significant performance lift over other credit attributes. Biz AttributesSM are also effective in segmentation, as overlay to scores and policy rules definition, providing greater decisioning accuracy. Additionally, at Experian we are constantly monitoring our growing data warehouse looking for ways to develop new attributes. We live in an ever changing market place which requires us to develop new credit and demographic attributes as well as making enhancements to existing attributes. This process takes a disciplined, rigorous, and comprehensive approach based on experience guided by data intelligence. Our goal is to provide world-class service and the industry’s best practices for modeling attributes. To keep pace with market changes, new attributes are developed as new data elements become available, while raw data elements and existing attributes are monitored and managed following rigorous and comprehensive attribute governance protocols to ensure continued integrity of attributes. If you would like to learn more about propensity models, contact your Experian representative today.

At the recent “Future of Data-Driven Innovation” conference, Emery Simon of the Business Software Alliance noted that each day 2.5 quintillion bytes of data is gathered. How much data is that exactly? To put it into tangible terms, if this data was placed on DVD’s, 2.5 quintillion bytes would create a stack tall enough to go from Earth to the Moon. As Experian’s CEO, Craig Boundy recently blogged, at Experian, we have deep experience harnessing the power of data, in fact; we have been doing it since 1897. Using our insights to help merchants and consumers by providing an annual credit reference directory, we were using “Big Data” before it became a buzz word. You can read Craig’s blog post here. But let’s talk for a moment about the economic impact Big Data can have on society. A recent McKinsey report estimates that improved use of data could generate $3 trillion in additional value each year in seven industries. Of this, $1.3 trillion would benefit the United States.     “Improved use of data could generate $3 trillion in additional economic value each year in seven industries.” McKinsey report: Open data; Unlocking innovation and performance with liquid information As consumers, we see the power of Big Data everywhere these days. Local and State governments are using data to tackle policy objectives like kick starting their economies and driving down crime-rates. In health care, Big Data is being used to reduce infant mortality. Researchers analyzing large data sets of vital signs from premature born babies discovered that whenever the vitals seem to stabilize, there is a high probability that a baby will suffer from a dangerous infection just a few hours later. Stable vitals are red flags, and recognizing them enables doctors to treat an infant before the full onset of the infection. And public health agencies are predicting and managing emergencies from the flu to Ebola with big data algorithms. HealthMap.org is an innovative mapping website that uses algorithms to scour tens of thousands of social media sites, local news, government websites, infectious-disease physicians’ social posts, and other sources to detect and track disease outbreaks. When healthcare workers in Guinea started to see patients with Ebola-like symptoms and blogged about their work, a few people on social media mentioned the blog posts. These blog post mentions were picked up by Healthmap. The result, an algorithm using big data told the story of a looming Ebola outbreak nine days before the World Health Organization formally announced the epidemic. Google can predict the spread of the flu, not through mouth swabs or by interviewing doctors, but simply by analyzing billions of search terms they receive from users of their search engine every day. The city of Syracuse, New York wanted to understand why certain neighborhoods declined over time. The city was struggling with abandoned housing, a phenomenon that is often associated with crime, poverty, and health issues. Analyzing local education, social services, economic, real estate, and police data, the city of Syracuse worked with a team of IBM Big Data analysts who demonstrated that certain trends can presage a decline in public safety, property value, and small business growth. Big Data applications in business In 2008 Starbucks CEO, Howard Schultz was forced out of retirement to get the company back on track after closing hundreds of under-performing stores. Starbucks now employs a disciplined data-driven approach to store openings by using Esri’s ArcGIS Online software, a sophisticated mapping platform which blends maps with demographic data. Starbucks can now pinpoint where their new stores should open, where they can be the most successful. Big Data correlations help Amazon and Netflix recommend products to their customers. In automotive manufacturing, predictive maintenance based on Big Data correlations enables companies to predict when a car engine part needs to be exchanged before the part actually breaks. In computer distribution, algorithms which analyze buying trends and payment data from millions of transactions can pinpoint the segment of customers who will soon stop buying. Identifying this cross-section of soon-to-quit customers enables sales organizations to proactively ramp up customer retention strategies to mitigate the risk of lost business. This helps our economy and our businesses thrive. In agriculture, there are companies and universities blending hardware with big data. Apple farmers in the Midwest are using bug traps fitted with sensors that can identify specific types of bugs in the trap. The traps are connected to the Internet in a data portal that the orchard manager can see where an infestation begins and stop it in its tracks. Being able to turn insights into action, farmers can use data analytics on bug infestations to use fewer pesticides, grow their crop more consistently and more profitably. Big data delivers tangible savings to tax payers The U.S. voter registration system is a challenge to manage. List maintenance can be difficult, and the system needs an upgrade. An inaccurate voter registration file can cost the government between $1 and $2 per year. For a state with 5 million voters, this could mean a cost of $0.5 to $2.5 million per year or more in additional costs, depending on the actual condition of the voter file. Orange County, California was able to update more than 297,000 voter records using information from TrueTraceSM, one of Experian’s most powerful data hygiene products. It draws from Experian’s core consumer credit database of more than 220 million consumers and 140 million households, as well as access to 100 million wireless phone numbers. Orange County saved over $44,000 in the first election alone – savings that will grow with each passing election as the county avoids mailing materials to out-of-date addresses. There are a lot of things to be excited about in the realm of Big Data. As Julie Brill, Commissioner of the Federal Trade Commission remarked at the recent Future of Data-Driven Innovation conference, “The data driven economy will not thrive unless the bits of consumer information collected and analyzed are used to benefit the consumer – plowed back into the relationship between businesses and their customers to make it stronger, deeper, and ultimately more profitable.”

Hello, I’m Hiq Lee, president of Experian’s Business Information Services, and I’d like to talk to you about how we are using data for good to help companies, large and small, succeed in the marketplace. At Experian, our group plays a crucial role in the big data ecosystem as an enabler of commerce and insights for the business community at large. We deliver unbiased information on more than 25 million active U.S. businesses, plus our international data capabilities, enable our customers to make more confident decisions on companies overseas. In 2012, along with Moody’s Analytics, we developed the Small Business Credit Index, which provides a unique perspective on the health of small businesses in the United States. The report contains important trends on bankruptcy rates, delinquencies, and overall payment behavior, as well as macro-economic information. This deeper look at the business landscape helps financial institutions and businesses every day to make sound lending decisions, gain key insights on business credit health and prospect for the right customer. At Experian, we are committed to delivering quality data and are strategically focused on the innovation of new and advanced products and services that enable businesses to thrive. Whether it’s analyzing millions of business credit transactions to generate industry-leading commercial credit scores and business credit reports, or safeguarding and securing millions of records to protect businesses and their customers from fraud, Experian is at the forefront of big data, driving value for our customers the world over. For Experian’s Business Information Services, using our data for good means constantly innovating and looking for ways to benefit businesses, as well as consumers and the overall economy. Related Data Is Good - Analytics Make It Great - Craig Boundy, CEO