Building the Next Generation Lending Decision Engine: The Porthos Way

Traditional lending decision engines do a really bad job, using outdated metrics and so favouring old styles of work, ignoring many of the recent changes in working practices and lifestyle.

One of the things that my colleagues and I are trying to deliver for our prospective clients at Porthos is how we will translate, through our aggregation engine, a better understanding of a client’s financial life into a service provider who helps clients toward their own and loved one’s better outcomes through financial innovation. To engage digitally at scale, we need to achieve this through simplicity rather than complexity, while also offering solution designs that increase accessibility. Simultaneous to it is essential that each client receives their own solution design, i.e., enjoys hyper-personalization. Our approach is also to use new thinking on solution design to compress the timelines between discovery, planning, execution, and attainment, and thus are exploring how we can create digital journeys alongside alternative decision pathways to improve exception handling, leading to lower costs in lending, and the prospect of higher returns in wealth accumulation. All this needs to be accomplished without compromising our TCF principles nor any of the rules and regulation of affordability and suitability that the FCA demands.

One of the chief areas we are focusing on presently involves how an organization with lending intention should be considering a person’s total net worth, as well as all their sources of income.  Traditional decision engines that are approving both long and short-term debt facilities don’t presently do a great job when it comes to the overall balance sheet and are particularly harsh on the treatment of illiquid asset positions, even if they have already proven to have high future earnings potential. This reflects the fact that traditional decision system designs were not programmed to consider the existence of a growing number of private markets, nor the changing nature of transferability and valuation in private asset ownership.  Digital marketplaces are not only emerging and scaling to increase liquidity prospects but are also creating new types of scenarios which can provide significant income streams through collateralization. Thus, while illiquid assets may not present themselves as immediate mechanism for cash conversion, they nevertheless can provide large future value or generate disposable income.  Both these factors should improve credit worthiness, and in turn increase access, while producing a better cost structure in the lending vehicle itself.

Alongside this impediment, current decision engines, particularly when operationalized in a siloed financial organization, don’t often adequately understand sources of income, or fail to recognize the finite gap that often exists between one level of income and another.  Entrepreneurs who move from a well-established and “safe” corporate existence to a start-up/scale up, and individuals that switch from employment in a limited company to employment through a partnership are often the ones who suddenly find themselves on the wrong side of credit worthiness. Often this situation can only last for a year, but it is not uncommon that a person with a 900+ traditional credit score can find themselves unable to access the same type of borrowing or the same cost once they start an entirely different pathway toward income, even as they may prove in business terms successful in turning investment into revenue, and revenue into higher salaries, and dividends.  In many circumstances, embarking on these sorts of risky journeys, not to mention transitions that involve moving from a regular monthly income stream into a different type of derived income (from investments for example) can reduce credit access and options for up to 36mths. This seems to us at Porthos a failing, as it is exactly in these situations where the decision needs to flex its client perception and embrace the opportunity that it is ahead. Punitive actions seem exactly the opposite of what TCF should mean for individuals in these situations and making these type of legitimizing life decisions.

Most decision engines, not surprisingly, have also been built on behavioural models that are strictly using a limited data set of actual borrowing, default, and bankruptcy data.   Consideration can also sometimes be made to the methodologies deployed for regular, and early repayment, as well as the way aggregated debt management and mental accounting are present or not present in overall debt servicing, but for many this naturally leads to both a limited set of inputs, as well as a narrow group of comparative peers. The availability of Open Banking as well as digital interfaces that broaden points of access much further, provide, in our view, a completely new way of understanding a client’s money behavior.  We are not the first to believe this but do believe that simply introducing model variables that reset credit worthiness based on payment consistency metrics as well as responsible budgeting is just a sound starting point as opposed to end game for introducing behavioral factors more broadly into credit decision making. In fact, at Porthos we are building what we believe is the first solution that re-classifies every type of money decision, and thus can recognize and account for any type of “good” decision. This type of categorization is extremely personal and means that when individuals or households make different types of spending decisions, as well as to move cash liquidity into investments, savings and pensions, these types of decisions can be scaled on their “long-term” value and not just on their short-term impact to debt servicing.  

At Porthos we are bringing these three considerations together in the design of our decision engine. By doing this, we are very confident that clients who turn to us will:

  1. Not be turned away because they display any element in their income streams that isn’t based on a normalized, payroll led input. In fact, we believe that are our aggregation approach will not only classify sources of income better, but also uncover untapped insights into ways of improving income streams in a suitability aligned manner. This level of optimization that is working in favor of a client borrowing less, shifting their borrowing timeline, and adjusting the tilt of short -term variable debt (expensive) vs. longer term fixed debt (cheaper) is something totally absent in the market today, even when engaging with intermediaries.
  2. See their level of accessibility to different types of loan structures increase based on the way their behaviour is accounted for in our modeling approach. While we will be asking clients to give us financial data consents, and opportunity to review and interpret documents in a way that it is beyond the current mandate sought by open bank participants through their own AISP interactions, the reward of having the ability to arrange borrowing faster, cheaper and in a manner that is highly personalized to one’s objectives, we believe will outweigh the extra level of information gathering and processing. 
  3. Be able to use loan structures that can fit into a much longer cash flow modelling approach then are currently being used to work out optimal debt servicing levels that are affordability. We are starting to witness some interesting salary smoothing concept based on forward receivables and salary advance structures for managing timing issues emerging, but our goal is to develop structures that can accommodate significant gaps between NPV and FV, using convertibility and optionality to build loan structures that are based on shared risk scenarios. We are seeing the beginning of these ideas in property financing through providers like Mcube (www.mcube.com) and Proportunity (https://proportunity.co/), and future earnings agreements from the likes of Stepex (https://www.stepex.co/) but we think we will be able to go much further by launching a proposition that is driven by a person’s full financial life, and not merely those assets that are only accessed through transactional, savings, or traditional investment platforms.

In conclusion, for those who join us on our journey, we can promise you a partner who not only is aware of the entirety of your financial life but is keen on celebrating the benefits you are seeking to acquire through your own unique journey. Further, you will find in us a partner who recognizes that good behavior comes not only from how you treat your mandatory obligations but also how you think about the evolution of money as a means toward the valued objectives you have for yourself, and your loved ones. Doing the right thing isn’t of course easy, and is sometimes temporarily impossible, but this shouldn’t be seen as immediately changing your net worth and future capabilities.  Finally, at Porthos, you will find in us financial collaborators who think taking a different pathway, no matter your age, or circumstances, is something that should be celebrated, nurtured, and supported.  Each of us as operators over 30+yrs has been through the highs/lows, the rocky and the smooth. We have thrived even when our banks have been absent, ignorant, and uninteresting. With Porthos we aim to be there through thick and thin, as they say “one for all and all for one (you)”.

Fill in our survey to tell us about where you would like us to most help you and those you love. Sign up to participate in our beta release before the end of the year at www.porthos.com.