The previous decade has been one of impressive growth and massive profits for financial services providers. As the global economy bounced back from the recession, new regulations, improved technology, and a friendlier landscape for lenders meant that financing and loans were easier than ever to come by. Over ten years later, it took only three months to undo most of that progress. The new post-COVID-19 reality has rendered most of our old financial assumptions useless.
Companies that were financially stable and paid their loans back on time every month suddenly find themselves shuttered; borrowers with sterling credit may now be high default risks due to factors completely outside their control. For lenders, this new reality means that the data and models they used to predict risk are completely broken.
How can you identify a great loan opportunity when the data you have doesn’t account for factors like whether a company is facing extended furloughs, is closed temporarily, or even if it is in an area that has a high incidence of coronavirus cases? Unfortunately for lenders, pre-COVID-19 data is no longer useful in a post-COVID-19 world. How, then, can we fix it? What avenues are there to redefine our models so that we can continue lending while mitigating our risk?
Instead of continuing to rely on models and data that are already outdated in our new reality, Explorium is helping our customers adapt and react to the new landscape. Especially in the lending sector, we understand that gaining as much relevant information as possible is key to making the right decisions. To do so, we’re connecting our customers’ data to an ever-growing list of COVID-19 related sources that are relevant today, to help them make better decisions.
One of our customers, a global small business lender, suddenly found that its risk models were invalidated by the outbreak of COVID-19. Companies with perfect financial records were forced to shut their doors, and entire regions were put under lockdown, placing even the strongest organizations at risk of default. To better understand their risk, our customer needed to view the problem with new eyes — and more relevant data.
We knew that our customer needed better visibility not just into the companies themselves, but into the factors that were now affecting their finances and default risk. As such, we approached the problem from three sides — the broader, industry scale; the company level; and the “crisis” level.
Our first task was to provide better context about the situation, so we looked at industry signals, including:
Next, we focused on the company level by enriching their data with:
Although we knew that this may be enough in normal times, the current crisis requires another level of visibility. So, we also connected our customer to a variety of COVID-19-related datasets. This gave them new, intriguing avenues to augment their predictive capability, including:
This new, enhanced model completely redefined how our customer modeled risk. Instead of focusing almost exclusively on internal data such as company financials and historic data, our customer now has a new perspective on which to measure default risk.
They can now account not just for a company’s record, but how their geographic location, their governments’ actions, and even how people’s sentiments about their industry and the pandemic itself could impact their ability to do business. Even in these unpredictable times, our customer can still provide an essential service without putting themselves at risk of making bad loans or being stuck with the bill on loans they can’t recoup.
It’s impossible to predict crises such as the one we’re facing, and companies’ entire outlook and risk models may be thrown out the window without a moment’s notice. However, this doesn’t mean lenders and financial services providers should be passive about it.
Continuing to rely on business-as-usual methods in abnormal situations is a sure way of ensuring a collapse. On the other hand, seeking out the best ways to bolster your models and find clarity in the most unpredictable of times can help you not just survive, but position your organization to thrive. The answer to today’s uncertainty is to find the best data to complement your existing datasets and information. We’re happy to be able to support our customers with a solution to do just that.