‘It was the best of times, it was the worst of times.’
This iconic opening line from Charles Dickens’ A Tale of Two Cities can easily be applied to lenders today. Financiers nowadays have as many advantages as they do challenges. While technology and data ubiquity have simplified the lending game, an increase in regulatory scrutiny, competition, and counterparty risks have complicated it. So, to get the best out of the times that we live in, lenders need to find a way to overcome today’s challenges and capitalize on its advantages. The TRaiCE platform can help financiers do just that by giving them 4 critical benefits that go a long way towards solving some of the fundamental challenges they face today.
Top 4 benefits of TRaiCE for lenders and financial institutions
Early problem recognition
Non-Performing Assets (NPAs) have been a perennial problem for financial institutions. Unfortunately, the issue is only likely to intensify in the future. As things stand, credit defaults are set to rise all across North America, Europe, Australia, and Asia in 2022. In fact, According to Moody’s, corporate loan default rates could even cross 9% under pessimistic scenarios by the end of the year. This is hardly surprising given recent current events like the Covid-19 pandemic and the Russia-Ukraine war. NPAs, apart from reducing an institution's overall capacity to lend, also decrease its stock liquidity, impede its ability to raise equity capital, and makes it more susceptible to systemic risks.
In addition, financiers everywhere are also dealing with tighter profit margins today due to a hyper-competitive landscape and increased risks stemming from global interconnectedness. Clearly, in the present volatile and attritional environment, lenders must reduce NPAs and credit defaults. In other words, the need of the hour is a proactive risk monitoring framework that predicts defaults rather than just reports on them. And the key to doing that and navigating rising defaults is early problem recognition. TRaiCE is an AI-augmented, fully automated risk monitoring and financial Early Warning System that lenders can use to easily monitor their portfolios. It analyzes financial and nonfinancial data to compute 2 risk indices – the Digital Risk Index and Early Warning Index.
The Digital Risk Index tracks business risk by quantifying nonfinancial and behavioral data. The Early Warning Index combines internal account data with credit bureau and alternative data to identify entities that are exhibiting signs of distress. By using both leading and lagging indicators in its risk calculations, TRaiCE ensures better accuracy with its risk predictions. It also ensures that lenders don’t need to wait for quarterly or half-yearly credit disclosures to perform their risk evaluations. Instead, they can evaluate their borrowers on a day-to-day basis. This increase in risk monitoring frequency and precision allows lenders to identify problem areas early and preempt defaults up to 6 months in advance, giving them enough time to take evasive actions and reduce write-downs on impaired assets.
Reduced regulatory exposure
Regulatory scrutiny on lenders has been increasing ever since the 2008 financial crisis. This increased attention was largely validated by the financial sector’s resilience during the Covid-19 pandemic. And as the world steps out of the shadows of the health crisis, one can expect compliance and regulatory activity to only increase. What’s more, ubiquitous digital transformation has ensured that regulators now expect financial entities to have resilient systems in place. Given this, lenders can no longer make do with a manual, rules-based compliance framework. These are costly and accident-prone and are also ineffective in preventing or mitigating the strategic risks that lenders have to take on to run a profitable business.
Instead, financiers now need a framework that is designed to increase their ability to proactively identify and contain risk events, thereby decreasing the chances of their assumed strategic risks ever materializing. This in turn protects a bank’s capital and liquidity reserves and makes it more resilient, which crucially, is a top priority for regulators nowadays. The TRaiCE platform’s ML-backed processes ensure that banks gain real-time visibility into all that is happening with their counterparties even in rapidly evolving situations like the pandemic. It also analyzes this information 24/7/365 giving lenders risk monitoring that is complete and continuous. With TRaiCE, financiers can therefore demonstrate to regulators that they have a robust exposure monitoring process in place.
The lending industry is changing radically with digitization, mounting competition, changing business models, and increasing regulatory pressure causing a veritable paradigm shift. These changes, while mostly beneficial to customers, can dilute an institution’s profit margins. As a result, maintaining profitability and cost-effectiveness continue to be a high-priority challenge for lenders today. The TRaiCE platform can help financiers overcome this challenge directly and indirectly.
In the former case, TRaiCE helps by making the risk monitoring process more comprehensive and effective. And according to McKinsey, improving monitoring efficacy with Early Warning Systems (like the one TRaiCE deploys) can help lenders reduce loan loss contingencies by up to 20%. In addition, such improved risk predictions can save banks $10 million or more annually. Crucially, this not only lowers an institution’s costs directly but also improves its capital efficiency, thereby ensuring it has the funds needed to enhance its market share.
In the latter case, TRaiCE helps lenders in several ways. For one, the platform gives financiers the infrastructural and data management capabilities needed to improve their operational efficiencies. Its proprietary algorithms automate time-consuming tasks such as data processing, inferencing, and other complex analytical jobs that would otherwise take even a bloated risk team days to complete. This way, lenders can maintain an end-to-end streamlined loan process that takes less time and personnel to complete (for more details on how TRaiCE helps lenders improve operational efficiency, check out our blog on the topic).
For another, the TRaiCE platform’s ML-led data processing reduces manual errors that plague legacy systems. Errors such as false positives and negatives can cost lenders billions of dollars annually. By using AI, TRaiCE effectively improves the quality of data and the quality of intelligence that lenders gain from all the information available today. This can have a measurable effect on a company’s bottom line, both in terms of investigative hours and dollars saved.
Better customer retention
In 2020, the US financial and credit sector had a customer attrition rate of 25%, the second highest by industry. This could be a reflection of the hypercompetitiveness of the space or just the fact that customers today expect more from their providers. Whatever may be the case, given the multitude of choices available today, lenders need to work twice as hard to retain their customers. The good news is that there is an unprecedented amount of data available today to help with that and TRaiCE can give lenders access to it all. With the platform’s database in place, lenders get the insights needed to reveal and facilitate up-selling and cross-selling opportunities. This along with a smoother and faster lending process helps create a frictionless customer experience and an easier path to retention. This is an additional cost-saving measure as it is much cheaper to retain customers than to acquire new ones.
Lenders today have many challenges to deal with. The TRaiCE platform is designed to help them handle these easily. By leveraging TRaiCE, financiers everywhere get specialized guardrails that allow them to take strategic risks safely. It can also help them appease regulatory demands while lowering costs, improving profit margins, and satisfying customers. By providing all these critical benefits, our hope is that we can play a small part in helping our users be impactful and stand out in the financial world.