Fintech Eagles Soar with Consumer and Small Business Data

Article Topics:

How is data driving innovation and fueling the Fintech space?

What Risk Managers and Board Directors should worry about?


Blog Author Email:

LinkedIn Profile:

Date: March 5, 2017


How is data driving innovation and fueling the Fintech space?

  • The regulatory requirements for financial institutions requires a strict 3rd party control environment for Privacy, Information Security, Compliance Disclosures, and Fair Credit Reporting (Federal Reserve). The Fintech control standard is generally weaker and usually relies upon a customer granting authority to the Fintech company to have access to their bank account data. The Payment Services Directive version 2 (PSD2) in the European Union as well as Dodd-Frank Section 1033 in the USA – allow consumers to access and convey rights to 3rd parties to access their personal and business financial records. Therefore, checking account and other bank financial data can be transferred to Fintech companies to run surveillance and analysis of customer financial data, enabling Automated Clearing House payments, marketing, and credit decisions, which is fueling innovation.
  • Why are the large data sets captured by Fintech companies stirring the strong interest of investors and financial institutions? Simply said, Fintech companies know how to use the social networks, bank, credit bureau, and other 3rd party data better than traditional financial institutions. They have designed improved credit processes delivered through mobile, social networks, and cloud-services using BigData and machine-learning models.
  • What are some examples of outcomes? Fintech has found a way to tap the finite pool of credit-worthy customers with accounts at banks, acquire them cheaply, and offer them a product that is either emotionally or rationally superior. No small feat given that the banks have been doing this for 50+ years. Please see the excerpt below from a letter written by Benjamin Franklin to his daughter that defines behavior of our national symbol, the Bald Eagle, that could be analogous to outcomes mentioned above by Fintech Lending companies. However, there are many other Fintech successes ranging from customer friendly mobile apps and wallets, crowd-sourced funding, peer-to-peer marketplace, and blockchain technology for digital authentication.



Excerpt from Benjamin Franklin’s Letter to His Daughter


“For my own part I wish the Bald Eagle had not been chosen the Representative of our Country. He is a Bird of bad moral Character. He does not get his Living honestly. You may have seen him perched on some dead Tree near the River, where, too lazy to fish for himself, he watches the Labor of the Fishing Hawk; and when that diligent Bird has at length taken a Fish, and is bearing it to his Nest for the Support of his Mate and young Ones, the Bald Eagle pursues him and takes it from him.”


“For the Truth, the Turkey is in Comparison a much more respectable Bird, and withal a true original Native of America . . . He is besides, though a little vain & silly, a Bird of Courage, and would not hesitate to attack a Grenadier of the British Guards who should presume to invade his Farm Yard with a red Coat on.”


What Risk Managers and Board Directors should worry about?

  • I know that these days it seems that everyone wants less regulation. However, there are core regulatory practices in financial institutions that protect consumers and small businesses as well as the liquidity and sustainable credit worthiness of financial institutions. Financial institutions have built complete acquisition, underwriting, servicing, and collection systems, mostly on legacy platforms, but tested and refined through numerous macroeconomic conditions. They also have MIS that provides evidence of regulatory adherence for compliance, credit, and operational risk. Risk managers should evaluate risks when integrating a Fintech product with their systems. As part of oversight and due diligence, risk assessments should consider relevant risk exposures given the narrow specialization of most Fintech companies. Areas to consider include money laundering, fraud, payment and collection practices, disparate credit treatment/fair lending, truth in lending disclosures, 3rd party management, privacy choices and data sharing, information security, and other operational risks.


  • In addition to the usual risks covered above, Consider the following scenarios:
    1. The next economic downturn may be driven by changes in fiscal policy, monetary policy, or regulatory changes creating an unexpected credit impact to certain segments. The following are some examples:
      1. Consider the impact of non-deductibility of interest expense for small businesses. The firms that have low margins and high debt will clearly be at risk. Resellers of wholesale goods are the largest users of short term credit and the most vulnerable to a loss of interest deductions as they already have low margins.  In addition, consider the risk if cash advances are billed as fees and could these fees be recharacterized as interest and non-deductible. Either way, truth in lending will be a focus by the regulators.
      2. Since consumers cannot deduct credit card or loan interest today, a tax law change here may be no impact to consumers. However, watch out as mortgage interest deductions may be cut massively.  I will bet that very few financial institutions or Fintech companies have modeled the scenario where wealthy small business owners with large residential or commercial mortgages may not have enough income to offset the loss of deductions by the forthcoming tax cut. Historical analysis shows that if the small business owner defaults on their mortgage or consumer debt, there is a 70%+ chance their small business will also default.
  • There may be certain segments seriously impacted by a border adjustment tax. There is so much financial uncertainty around retail given the threat from online and potential non-deductible imported cost-of-goods-sold. Can retail produce low margin goods and clothing in the US? Probably not.  And, there is no export offset as most retailers are generally NOT large exporters.
  1. Funding – watch what happens when default rates and interest rates rise at the same time. Funding may dry up for Fintech lending portfolios but not for financial institutions.


  1. Valuation of Fintech companies: The aggregate Fintech space consists of over 1000 companies with $105 Billion invested. The current estimated market valuation of the Fintech space is $867 Billion, which is larger than the combined market capitalization of Chase/JPM ($323B), Wells Fargo ($290B), and Bank of America($242B) on February 26, 2017 (Su).  Another interesting sign of potential Fintech exuberance is the success of the LendIt and Fintech Conference in NYC on March 6-7, where there are 20+ main speakers and over 200 speakers for the exhibitors. The number of sponsors of the conference is approximately 83 which is in addition to the exhibitors (LendIt USA 2017).


  • Customer engagement happens through good communication, trust, service, financial security, and transparency. The current environment is enamored with technology innovation as evidenced by the large valuation and success of the social networks and technology companies.  The sharing of data across the technology ecosystem can have negative implications in cybersecurity, fraud, and privacy. Certain lending customer segments prefer long-standing business relationships, while millennials and other younger segments prefer the latest mobile technology and instant model-driven decisions that Fintech and leading financial institutions are providing.


The amount of data being captured today fuels faster decisions and better targeting, but certain customer segments want more transparency and control of their data in the future of risk management.


This blog reflects personal views, opinions and positions associated with my role in RiskDirector, LLC. and those providing comments on this blog are theirs alone, and do not necessarily reflect the views, opinions or positions of the companies discussed, current or former employer companies, nor of the authors in the works cited. I make no representations as to accuracy, completeness, timeliness, suitability or validity of any information presented and/or commenters on my blogs and will not be liable for any errors, omissions, or delays in this information or any losses, injuries or damages arising from its display or use.

I reserve the right to delete, edit, or alter in any manner I see fit blog entries or comments that in my sole discretion, deem to be obscene, offensive, defamatory, threatening, in violation of trademark, copyright or other laws, of a commercial proprietary nature, or otherwise unacceptable.



Department of Commerce. 2016 Top Markets Report Financial Technology (n.d.): n. pag. 2016 Top Markets Report Financial Technology. U.S. Department of Commerce, 2016. Web. Feb. 2017. <;.

Federal Reserve. “Fair Credit Reporting Act.” Consumer Compliance Handbook (2016): FCRA, SourceMedia. Nov. 2016. Web. Feb. 2017. <;.

“FinTech Landscape.” VB Profiles. Spoke Intelligence, 2017. Web. Feb. 2017. <;.

Franklin, Benjamin. “Turkey Quotes – The Eagle, Ben Franklin, and the Turkey.” Quotes Famous Quotes – Famous Sayings., 22 Nov. 2008. Web. Feb. 2017. <;.

“LendIt USA 2017.” LendIt USA 2017. Lendit Conference LLC, 2017. Web. 03 Mar. 2017. <;.

“Ranking the Top Fintech Companies.” The New York Times. The New York Times, 06 Apr. 2016. Web. Feb. 2017. <;.

Su, Jean Baptiste. “The Global Fintech Landscape Reaches Over 1000 Companies, $105B In Funding, $867B In Value: Report.” Forbes. Forbes Magazine, 28 Sept. 2016. Web. Feb. 2017. <;.



Fintech Lending Gobbles High Yield – Poem

Blog Author Email:

LinkedIn Profile:

Date: March 5, 2017


During my 16 years at American Express, I was called upon to provide employee engagement and levity for the opening presentation at Town Halls.  Working with employees at all levels, we would develop a communication strategy that aligned with the key messages of the Town Hall. I would usually write a poem to go along with the dance, song, or video. Here is a poem for those people who miss me.


Fintech Lending Gobbles High Yield  – Poem


Groups of wild turkeys are called flocks,

Fintechs produce technology building blocks.

Who are these Fintech lenders, who abound

Looking for unserved borrowers to be found?

BigData nearest neighbor targeting is all the rage,

But not proven through downturns at this stage.

Rush to machine-learning models to gain the edge,

But is the risk insight missing on how to hedge?

If customers disengage and make a partial repay

An early Charge-off is not a happy Thanksgiving Day.

Sustained low interest rates have created yield gobblers,

Which creates opportunities for risk perspective bloggers.

Assessing risk strategies against a new Installment Loan product from Goldman Sachs

Blog Author Email:
LinkedIn Profile:
Date: February 9, 2017

Assessing risk strategies against a new Installment Loan product from Goldman Sachs 

How should risk management assess risk strategies for new competitive products? I will suggest some approaches in this blog. It’s been roughly 3 months since the full launch of the Goldman Sachs

Marcus™ installment loan platform. If you are sitting in either a traditional bank with a large credit card business like Chase, Bank of American and Citibank, or a predominantly credit card company like American Express, Discover or Capital One, you might be asking how the Goldman Sachs’ installment loan offering could change the competitive environment or impact your risk strategies.   In my years running an enterprise risk management group that reviewed new competitive products, I provided early assessments as part of emerging risks to management and the Board until performance data could be analyzed. Is that approach sufficient?


Before I provide some comments, let me try to summarize in the paragraph below the “Marcus by Goldman Sachs” Installment Product (MGS) based on reference material cited below. Please check the MGS website for yourself as it does a thorough job explaining the product (Goldman Sachs).


MGS Trademark: “Debt Happens. It’s how you get out that counts.”

Active Acquisition strategy: Target prime credit card customers with 660+ FICO and interest rates higher than Marcus using a prescreened process that provides an invitation code.

Passive Acquisition through Website: The MGS website is open to all but Maryland residents. APR:  Fixed rate from 5.99% to 22.99% with a positively sloped interest rate term structure.

Term: 24 months to 72 months

Amount: $3,500 to $30,000

Fees: Amazing but true! No late fees. No origination fee. No prepayment fee.

Default Pricing: Given the documentation, I see no ability to increase interest rates without calling the first loan in default and then issuing a second installment loan. Missed payments generate more interest which is payable at maturity.

Default reporting: Credit Bureau reporting is the major stick to encourage repayment.

Multiple Loans: No information provided on limits on multiple installment loans to the same borrower. Payments due: Within 16 days of statement but higher paydowns shorten duration. This is a clever benefit of the product that early paydown enables a higher effective yield relative to the duration of their liabilities.



One approach to monitor the early success of a competitive product is to review the customer commentary on social media as well as the regulatory complaint filings.  This provides insights into the execution of the product launch.  As of January 2017, there was limited customer feedback for MGS on the internet.  One very small sampling of customer feedback from, shows that customers that get approved are relatively satisfied with the MGS process, and those that do not get approved are unhappy if they received a letter with the invitation code to apply (SuperMoney).  The application process without the invitation code was simple and straight forward.  Under certain conditions, MGS may require a copy of the driver’s license, W-2’s, or recent bank statements, which can be uploaded seamlessly. Overall, the initial launch website is well-designed and effective and supports a good, albeit not great, customer experience.  My assessment is an opinion given that many existing retail banking, credit card companies, and fintech companies have additional information both in time and depth of consumer relationships and data sources that MGS may not have built as a new entrant into retail banking. Are the customer experience differences important enough to include in your assessment?


Another risk assessment approach looks at the technology platform and financial strength compared to the legacy platforms and funding sources in retail banking. What is the potential financial impact of a new entry into the market?  The MGS platform was impressive as a cloud-based system with phone support and a customer-driven payment structure informing a narrow range of installment loan parameters. There is no question that MGS will have the funding and securitization strength to continue to grow and their expertise will improve.  My assessment is that the launch of Goldman Sachs’

Installment product and acquisition strategy will cannibalize the credit card industry customers and force lower credit card interest rates for consumers with prime credit.  This will lower the yield and net interest margin for all of retail banking.  In addition, the use of 0% balance transfers and low teaser rates will become much less profitable for traditional credit card issuers.  I also think that MGS is well-suited to absorb loans at a discount when poorly funded fintech companies face a recession and want to unload debt.  This risk assessment approach speaks to the sustainability of the competitive and risk management threats of a new competitive product. The MGS installment loan product has a long tail of competitive implications.


We have already talked about MGS internal acquisition strategies for organic growth.  Another approach is to assess the competitive threat for external acquisition.  Goldman Sachs has already shown its ability to provide financing for fintech companies, and it is reasonable to assume they may acquire some of the fintech technologies to accelerate their growth.  When a well-capitalized competitor has an appetite to make external acquisitions, it lowers the growth options for existing retail banking companies.


Finally, I have one last suggestion for a risk assessment approach for new competitive products. What would be the pre-mortem risk assessment of the new product in a macro-economic recession or under stress conditions?  I am assuming the existing regulatory environment given that the Trump changes are uncertain.  My experience spans commercial, small business and consumer lending through the Great Recession of 2008, the small business/internet recession of 2001, and the S&L interest rate driven recession of 1990-1991.  Given the MGS structure and lack of restructuring options disclosed today, I assume that the MGS installment loans have a consumer-friendly prepayment advantage over credit card loans given that installment payments stay fixed given there are no late fees and default interest rates.  However, the loss rates in recessions also reflect the rate of growth of balances just before the recession.  Therefore, companies with very predictive customer credit models may encourage customer paydowns funded through balance transfers out to competitor installment loans or other products. My experience is that installment loans usually have higher default rates than the customer’s primary revolving credit facilities since the latter provides ongoing customer funding. There is an adage attributable to small business owners’ view of repayment during recessions, “a dollar borrowed is a dollar earned, and a dollar repaid is a dollar lost.”  The credit card companies provide ongoing liquidity and funding with revolving credit and they can decide based on the probability of a borrower credit default to provide further funding or work with the customer using their recovery products approved within regulatory guidelines. During recessions, the consumer chooses whom to pay when she/he cannot pay all bills.  My experience is that some lenders lose to other competitors based upon the competitor’s commitment for ongoing funding support, which today is untested at MGS.




This blog reflects personal views, opinions and positions associated with my role in RiskDirector, LLC. and those providing comments on this blog are theirs alone, and do not necessarily reflect the views, opinions or positions of the companies discussed, current or former employer companies, nor of the authors in the works cited. I make no representations as to accuracy, completeness, timeliness, suitability or validity of any information presented and/or commenters on my blogs and will not be liable for any errors, omissions, or delays in this information or any losses, injuries or damages arising from its display or use.


I reserve the right to delete, edit, or alter in any manner I see fit blog entries or comments that in my sole discretion, deem to be obscene, offensive, defamatory, threatening, in violation of trademark, copyright or other laws, of a commercial proprietary nature, or otherwise unacceptable.





Crosman, Penny. “Goldman Sachs Reveals Technology Behind Marcus.” American Banker.

SourceMedia, 30 Nov. 2016. Web. 30 Jan. 2017.


Goldman Sachs. “Personal Loans from Marcus by Goldman Sachs.” Personal Loans from Marcus by

Goldman Sachs. Goldman Sachs Bank USA, 2017. Web. 30 Jan. 2017.


“Marcus by Goldman Sachs Deploys Finacle Solution on Cloud for Its New Online Lending Business.”

Infosys Press Releases. Infosys Limited, 30 Nov. 2016. Web. 30 Jan. 2017.


Popper, Nathaniel. “Goldman’s Online Lender, Marcus, Opens (to Those With the Code).” The New

York Times. The New York Times Company, 13 Oct. 2016. Web. 30 Jan. 2017.


PYMNTS. “Goldman Sachs Gets Closer To Consumer Lending.” What’s Next Media and

Data Analytics, LLC, 26 July 2016. Web. 30 Jan. 2017.


PYMNTS. “Goldman To Launch Online Lender Marcus.” What’s Next Media and Data Analytics, LLC, 19 Aug. 2016. Web. 30 Jan. 2017.


SuperMoney. “Marcus by Goldman Sachs Personal Loans on SuperMoney.” Reviews – Personal Loans.

SuperMoney, LLC, 29 Jan. 2017. Web. 30 Jan. 2017.


Sales Incentive Plans that Align with Risk & Regulatory Guidance

I am quite sure that most large financial institutions have reviewed the largest sales incentive plans to ensure that they address employee conduct as well as protect the customer during the sales process.  In my prior corporate roles (please review my resume link: hyperlink), I developed principles and processes for establishing risk-balanced goals.  My view is that clear goals are important to guide an organization toward the strategies and performance objectives.  In my opinion, it is a mistake to communicate a long term commitment that a company is “eliminating product sales goals for all retail bankers to make certain nothing gets in the way of doing what is right for our customers” as stated in the Wells Fargo shareholder letter.  Management can temporarily suspend sales goals to address short-comings in incentive compensation programs.  I do applaud the Wells Fargo process improvements cited such as improving account opening transparency, customer remediation, and an independent review of sales practices.

The importance of fair and risk-balanced sales incentive programs is important even if regulatory guidance is reduced. In fact, I see a continued focus on incentive compensation and tying executive compensation more closely to performance, risk-balanced accountability, and increased consumer, political, and regulatory awareness of corporate policies. No firm wants the reputational risk that could arise from the ire of Congress, negative consumer sentiment, legal actions against the company, regulatory action by the OCC regulators and fines by the Consumer Financial Protection Bureau (CFPB). What is required is important changes in our business practices, compensation systems, and compliance programs to improve our legal and ethical culture not covered in the existing code of conduct.

All companies try to increase sales and many employ goals or metrics. In my opinion, eliminating sales goals entirely may create a void in how strategic initiatives will be measured, communicated, and monitored. However, before I suggest an alternative approach, let me review briefly the legal and ethical issues related to specific events at Wells Fargo that every institution should consider.

Under the direction of various regional leaders, there were over 1.5 million banking deposit accounts and 565,000 credit card accounts without customer authorization. This violated the Dodd-Frank Wall Street Reform and Consumer Protection Act which “prohibits unfair, deceptive, and abusive acts and practices by financial institutions” (“Consumer Financial Protection Bureau Fines Wells Fargo”). In addition, the account opening processes may have generated fees and delinquencies negatively affecting consumers’ credit bureau and FICO scores in violation of the Fair Credit Reporting Act (FCRA) law that requires accuracy and privacy of information reported to credit bureaus (Andriotis). The company fired 5,300 employees and managers for violation of Wells Fargo’s Code of Conduct, which represents our company’s existing ethical standards for how business should be conducted (Keller and Westbrook). These employee firings led to a class-action lawsuit on September 9, 2016 seeking $2.6 billion for wrongful termination accusing Wells Fargo of applying unlawful sales and business practices (Reuters). These recent legal and ethical issues are in addition to the 2015 lawsuit by the Los Angeles district attorney on unfair business practices and violations of law regarding misusing personal information and violating state data breach notification laws (Reckard).

Rather than permanently eliminating sales incentive goals, my recommendation is to develop a more transparent reporting system with escalations to senior management through explicit controls to ensure ethical and legal adherence.  Let’s look at some of the principles that a company should consider when reviewing incentive compensation plans.

  • In today’s world, the use of metrics and strategic goals will continue to play a major role in communicating success and failure for shareholders, employees, regulators, and customers. The challenge is what are the correct metrics for the products and customer segments targeted. Could the sales incentives drive inappropriate behavior (Zoltners, Sinha, and Lorimer).
  • The Human Resources Department should have a process to monitor and report feedback and complaints to senior leaders on their performance goals. This will create a communication channel to senior leaders as well as the Board’s compensation committee.  Feedback can be positive or negative. An example of positive feedback, is the level of management support (e.g. effective advertising of customer benefits, providing the sales team with customer incentives) provided to help the employees attain their goals and satisfy customers’ needs.
  • Compliance, Audit, Human Resources, and Risk Management should conduct an annual review of prior year issues under incentive plans or goals. Their analysis should be considered in designing and altering new goals or incentive plans for the upcoming year as well as provided to senior management.
  • Define goals as targets that includes a reference to documentation on how goals should be attained. The incentive compensation system should treat employees fairly given the environment and processes in place.  Targets should not be viewed as minimum mandatory performance requirements. Incentive compensation should consider the outcomes, and more importantly, how the outcomes were attained.
  • Design mandatory training for employees to learn how to properly conduct business and provide examples of activities that do not conform to the culture, code of conduct, or would be considered ethically wrong. Too often in our culture, we do not step back and look at the big picture of “how did we achieve our goals.”  Avoid the Machiavellian culture where “the ends justify the means.”

I have seen incentive compensation programs evolve over time and it is a journey not a destination as strategies and the environment keeps changing. Good luck and provide feedback.





Andriotis, AnnaMaria. “Lawmakers Worry Wells Fargo Sales Practices Hurt Credit Scores.” WSJ., 20 Sept. 2016. Web. 25 Sept. 2016. <;.

“Consumer Financial Protection Bureau Fines Wells Fargo $100 Million for Widespread Illegal Practice of Secretly Opening Unauthorized Accounts | Consumer Financial Protection Bureau.” Consumer Financial Protection Bureau. United States Government, 8 Sept. 2016. Web. 25 Sept. 2016. <;.

Keller, Laura J., and Jesse Westbrook. “Wells Fargo Drops Product Sales Goals for Retail Bankers.” Bloomberg, 13 Sept. 2016. Web. 25 Sept. 2016. <;.

Reckard, E. Scott. “L.A. Sues Wells Fargo, Alleging ‘unlawful and Fraudulent Conduct'” Los Angeles Times. Los Angeles Times, 4 May 2015. Web. 26 Sept. 2016. <;.

Reuters. “Wells Fargo Employees Who Lost Their Jobs Are Suing the Bank.” Fortune Comments. Fortune, 26 Sept. 2016. Web. 26 Sept. 2016. <;.

“To Wells Fargo Customers: Our Commitment to You.” Wells Fargo. Wells Fargo, Sept. 2016. Web. 25 Sept. 2016. <;.

Zoltners, Andris A., PK Sinha, and Sally Lorimer E. “Wells Fargo and the Slippery Slope of Sales Incentives.” Harvard Business Review. Harvard Business Publishing, 20 Sept. 2016. Web. 26 Sept. 2016. <;.