Risk-based pricing in India is still at a nascent stage. With the strengthening of credit bureau presence, credit score-based underwriting and alternative methods of risk evaluation, we can expect risk-based pricing to pick up over time.
Financial frauds are closer than you think. All the more reason why you need to be on your guard.
According to Experian India Fraud Report 2018 -19, 65 percent Indian consumers surveyed have reported an increase in fraud-related losses over the past 12 months. These include account takeover attacks and fraudulent account openings. Identity theft at 28 percent and market alert frauds at 28 percent were the leading contributors to the overall frauds. In the Asia Pacific, maximum number of frauds were reported from India.
Sathya Kalyanasundaram, Country Managing Director of Experian India, weighs in on the fraud trend in India, asking consumers to take care in sharing personal data with lenders, rise in consumer awareness on credit scores, introducing risk-based pricing by lenders and more.
Q: According to your Experian India Fraud Report 2018-19, please elaborate on the fraud trends and how they are changing India’s credit system?
A: With the constant advancement of technology, we have witnessed a growth in customers applying for financial products across multiple channels – offline and online, especially through smartphones. This has led to an increase in the number of identity thefts, false identities and organised fraud networks.
Experian’s recent report highlights the frauds that have been detected at the application process itself — preventing the fraud — and not after credit approval.
There are key fraud application trends identified on the basis of our study. Identity theft continues to be one of the major reasons for application frauds in India. However, there has been a 13 percent decrease in identity theft compared to the previous year though it is still significant at 28 percent.
As part of application fraud (i.e. fraud at the time of making applications), fraudulent contact information has significantly increased to 25 percent from 10 percent over the last year. The retail loan industry in India has observed the maximum number of individuals dealing in fraudulent contact information during the loan application.
Application fraud is the highest in credit cards at 1.4 percent and lowest in two-wheelers at 0.3 percent. On an average, across all products categories, if there are 100 applications received for a loan, one out of those would be rejected for fraudulent intent.
Q: In your report, we observe market alert frauds as the top reason for declining loans to consumers. Please explain what is it?
A: Hunter is a platform that is used as a fraud repository across a number of Indian banks, non-banking financial companies (NBFCs) and insurance firms. When a fraud is reported by one bank / NBFC on the Hunter platform, it is the basis for rejection of an application because the same fraudster has applied again to another bank. Then, such a rejection is tagged as “application declined due to Market Alert of Fraud”.
According to our report, market alert frauds stand at 33 percent in home loans, 32 percent in credit cards, 35 percent in consumer loans, 27 percent in auto loans, 26 percent in two-wheeler loans and 18 in personal loans. Banks will continue to receive applications from repeat fraudsters. However, they can avoid giving credit to such fraudulent customers by using a platform which alerts them proactively.
Q: According to your survey, 70 percent of consumers see benefits in sharing personal data such as financial, commercial or biometric or contact information, while transacting online. Suggest key precautions consumers must take while sharing their personal data with companies.
A: Based on the findings of our report, it is imperative for businesses to take a proactive approach when it comes to educating and communicating to consumers about how their data are utilised. However, it is also important for consumers to pay attention to how data are utilised and look out for appropriate information/clauses provided by the businesses. Consumers should ask relevant questions pertaining to the use of their data and be comfortable with the information received prior to sharing their personal data with businesses.
Q: We observe fraud rates are highest for credit cards (1.4 percent) followed by personal loans (1.2 percent) in your report. What should the banks (lenders) do to reduce their risks?
A: Credit cards and personal loans are largely viewed as unsecured loans. We have witnessed a higher percentage of fraud in this space than the secured lending space.
Banks have to tread a thin line between providing credit to the unsecured segment, which seemingly has more frauds as there is no collateral provided and the need to provide instant credit is high based on market demand. There are platforms which have mechanisms that prevent fraudulent intent. This should be taken up by the banks to provide unsecured products at a faster pace and reduce the risk of frauds.
Q: When can we expect risk-based pricing a reality by the banks?
A: Risk based pricing in India is still at a nascent stage. For the few financial institutions that are doing risk-based pricing, the spread between rate of interest offered to a high score customer vs low score one is still low. With the strengthening of credit bureau presence, credit score-based underwriting and alternative methods of risk evaluation, we can expect risk-based pricing to pick up over time.
Q: Banks and lenders are known to look at alternative data to gauge a customer’s profile and try and see if the customer would pay her EMIs regularly or not. Do you have evidence that shows lenders are using this more and more? And what does bank / lenders look at typically in alternative data?
A: India has a large segment of customers who do not have any past credit history and hence, bureaus are not able to help the lenders in underwriting these customers. Thus, the use of alternative data of customers for lending is increasing, but the pace of growth is low as compared to the market opportunity. This approach is being used by niche players for lower ticket size lending using e-commerce data or wallet transaction data or your phone and profile information. However, the share of alternative data based lending is about 5 percent at the moment.
We at Experian realise that there is significant work which needs to be done by the bureaus to ensure quick scale-up of alternative methods of credit assessment. We have been working with lenders to develop proprietary underwriting models based on data obtained through consumer consent. This has seen a significant growth for our lending partners. Experian Digital Insight Score is a step in this direction. Experian has partnered with a payments player to create a predictive lending score and we are seeing encouraging response from lenders to use this score for lending.
Q: How is the rise in awareness among consumers to apply for one free credit report in a year from the credit bureau and analyse the credit scores?
A: We see a steady rise in consumer awareness regarding their credit scores; this has led to a multi-fold increase in the number of free credit reports accessed by consumers over the years. Bureaus and banks have played a key role in building credit knowledge and awareness among consumers. We have actively tied up with multiple partners to make it easier for consumers to access our free credit reports. Our reports can be accessed on bank and financial aggregator websites. We believe that this has also contributed partly to the increase in consumer awareness.