Rich Alterman  00:04

You're syncing up and tuning in to The Lending Link Podcast, powered by GDS Link, where the modern day lender can dive deeper into the future of data, decisioning and credit risk solutions Welcome to the show everyone, I am your host Rich Alterman, and today we will be discussing the impact of inflation and rising interest rates on consumers and lenders and so much more. I'm joined today by Kevin Moss based in the town of Danville, California, part of the San Francisco Bay Area. Kevin is a banking lending payments and credit risk and compliance management veteran, having held key roles with Wells Fargo, with Sofi, where he was chief risk officer, he ran his own advisory firm and most recently joining the Boston Consulting Group as a senior advisor. Kevin was also a college professor teaching statistics at NYU Graduate School of Business at Montclair State College in New Jersey. Before we start, don't forget to head over to GDS Link's LinkedIn and Twitter pages at GDS Link and hit those like and follow buttons. And be sure to subscribe to the learning link on Apple Podcasts, Spotify or wherever you prefer to listen to your podcast. Alright, now let's get synced with GDS Link. Good morning, Kevin and welcome.

 

Kevin Moss  01:25

Thanks, Rich. Appreciate you having me on the show.

 

Rich Alterman  01:29

Well, I definitely want to thank you for joining The Lending Link today and being my very first guest. Very excited to be chatting with you. So where are you joining us from today?

 

Kevin Moss  01:37

The East Bay Danville, California, our home here, usually also in San Francisco during the week, but today we're out at our home. Right. Appreciate that.

 

Rich Alterman  01:49

So before we get talking about business, let's get a bit personal. I know you were born in Long Island and went to undergrad at George Washington University and right after that in New York University to get your Masters. How did you end up in California? And what was the big change for you after growing up in New York?

 

Kevin Moss  02:04

At the time, I've been through like, I think six mergers and acquisitions in the banking industry. And one of them was on the East Coast living in Delaware. And I had met the chief risk officer of Bank in New York, which was one of the firms I work for, who introduced me to the chief credit officer of Wells Fargo. And I reached out ended up getting an interview and a roll out here and moved out here in 1998. So, Bay Area's been home for almost 25 years now. And it's where I think my kids feel is home, where they really grew up, and this is where my family is. So at this point, it feels like I've been here forever. And I do miss a lot of the food in New York, the pizza, the bagels, you know, I really enjoy what the bay area has to offer.

 

Rich Alterman  03:02

So let me ask the question, when you're not working, what are some of the things you'd like to do that brings joy to your life?

 

Kevin Moss  03:07

Well, I'm a big basketball fan. We're warriors season ticket holders for a number of years now. And I'm so excited that we're seeing pregame the season starts on the 18th. So basketball is one of my favorite things. And then you know, we have a big family, we have six kids and four grandchildren with a fifth on the way so that pretty much every weekend involves doing things with our family, like this weekend, we had a baby shower that we sponsored on our side of the family. So between the big family working, going to basketball games, I like to follow the financial markets. There's not a lot of time left to do some other things I used to play golf many years ago. But for the most part, I do like working out, but that's about it. I mean, there's there's not a lot of time left, unfortunately for other things.

 

Rich Alterman  04:00

Well, thanks for sharing, it's always good to get to know people a little more on a personal basis. So let's, let's dive in about business side of things. Like you and me. We've been in this space for a very, very long time. I think together we have about 80 years of experience in the industry. So as you think about it, what would you say have been some of the biggest changes that you have seen in our industry during the time that you've been involved?

 

Kevin Moss  04:22

I mean, when I started, I think it was 1984. There were five credit bureaus. There were a lot of private Bureau and local offices. We've seen all that consolidate into the three major credit bureaus. Credit scoring was very simple. We used to have what you call the step one score, where it was expensive to get a credit report. So if you couldn't pass the score based on your application information, you will be declined exclusively. Today, it's mostly based on the credit bureau. And I think probably the biggest thing that I see is just the advancement in data and analytics, many of the algorithms, regression based algorithms were prevalent back then, because they were easier to calculate. But today, we can do amazing things with machine learning and decision trees and all kinds of ML and AI type applications. So I think the data that's available, and the algorithms that are available today to build models and strategies and the Internet was not really out there. I mean, I remember getting my first personal computer back in the late 80s. on floppy disks.

 

Rich Alterman  05:37

I remember my first computer at Citicorp was a trs 80. Visit from RadioShack, I believe. Yeah, one of the things I talked about on the first podcast and you kind of mentioned it, Kevin, here is the sheer number of data bureaus that are available today. I mean, when I joined GDS, we had shown our connector listed at Equifax, Experian, TransUnion, Dun and Bradstreet, and that was it. Today, when we talk about it, there's 100 that we work with in the US and probably about another 100 globally, but certainly one of the big areas we've been seeing on the data side is around permission data, where consumers or businesses have to permission themselves in and you know, we think about, on the open banking side, we have companies like Plaid understand that you recently joined, they're on the advisory board Yoli, Direct ID and congrats for that. On the employment side we have Argyll and Pinwheel are some of the companies out there now. And then on the business  side, we think about companies like Kodak. And valid is one of the things I was thinking about, as we see more and more of a movement to let consumers control ownership over their data, thought about the main bureaus, Equifax, Experian, TransUnion, and maybe even LexisNexis and the Novus, could you envision a day where those main bureaus may also move towards a platform where consumers do permission themselves similar to what we see with the Plaid,Yolis and Argyll's of the world?

 

Kevin Moss  07:00

Well, I think some of that infrastructure is already in place. I mean, first off, technically, you got to, if someone's going to pull your credit, you have to give them permission, by opting in to that. But if you wanted to, you could freeze your credit report. And the only way to get to it would be to allow it to be unfrozen. But only a very small percentage of people actually use it today. And I think the reason is because Americans have gotten used to, like if you walk into a retail store, and they offer you 10% off by purchasing it on credit, people like the speed and availability of credit. But I think and frankly, when I think about, like the financial data exchange, right now, on average, 50% of the people, when you request, their online banking credentials opt out, because they don't want to share their personal credentials. Financial Data Exchange, is trying to create a framework where that data gets tokenized, where you get like a one time pass code through a common structure that everybody will exchange data with. And so even that could move away from credentials. But certainly you'd have to, as the owner of that data, once 1033 comes to pass, consumers are going to own their financial transaction data. I think those two things together will likely drive, I think, an easier process than it is today. And and maybe a more trusted process.

 

Rich Alterman  08:45

So maybe you could elaborate a little more on the financial data exchange, who are some of the drivers behind that initiative, all the

 

Kevin Moss  08:53

big banks are members, all the aggregation companies plan for this city, you know, MX, they're all of those are involved in this. It's going to take some time. But I think once 1033 passes, the need to have a consistent framework, and tokenization of the permission, I think is going to be essential to enabling a lot higher than 50% access to this.

 

Rich Alterman  09:25

So as our primary topic today, I want to chat about the impacts that inflation and rising interest rates are having and will continue to have on the lending industry and of course, consumers. There's no doubt that the current economic conditions are impacting consumers ability to manage their financial affairs and make ends meet. In August the Lending Club cooperation the parent company of the Lending Club Bank released findings from the 12th edition of the reality check paycheck to paycheck research series conducted in partnership with payments.com. Kevin, I'd like to share some very concerning findings from that report. In June 2022 61% of Americans were living paycheck to paycheck up from a low of 52% in April 2021 and 55% in June of 2021, the average savings dropped $517 from 11,724 in May of 2022 to 10,757 in June of 2022. The biggest rise in paycheck to paycheck consumers wasn't consumers earning between 100,000 and $150,000. Up 11 percentage points from May 2022 to 52% in June of 2022, pretty astounding, an estimated 33.5 million or 13% of US consumers spent more than they earned in the past six months. That's incredible. And of course, in addition to the rise in the cost of daily living expenses to finish sharply increase the cost of capital, making it more expensive for non bank, FinTech lenders to put capital on the street. With these two forces that work, let me open it up to you to share your industry observations and perhaps your predictions for the next 24 months and most importantly, what recommendations you have for lenders to successfully weather the current storm.

 

Kevin Moss  11:05

Well, first off, FinTech grew up in a low interest rate, low inflation environment, to right now with with what's going on in the world, between, you know, the effects of COVID, the war in Ukraine, and the supply chain challenges, higher inflation has driven the Fed to raise rates pretty dramatically over the last few months, and so this is one of the first times that FinTech has actually worked in a higher inflation, higher interest rate environment. And in my view, this is an area where being a bank is a big advantage, because banks have a thing called deposits. And banks, when rates rise, interest margins of banks widen, because deposit rates rise much more slowly. Right. So fintechs fund themselves with warehouse facilities, securitization markets, they originate to sell, and credit spreads have widened at the same time. So this is probably the most difficult environment that I certainly had been in since I've been involved with FinTech for the last seven and a half years. And it may be the most difficult environment. Certainly, we had a tough March and April in 2020, when COVID hit, but this is going to be a prolonged environment where we're gonna have inflation, there's components of inflation that are sticky, that aren't going to be driven by interest rates, like the cost of energy, supply chain issues with chips, like those things aren't going to resolve themselves simply because rates are higher, right, the idea of softening demand. So in my view, what we're gonna see in this environment is, we're gonna see some, we're seeing new venture capital funds being much lower, new lenders are not getting funded, unless they have really good ideas, good leadership teams, and I feel that in my consulting, because that was who I've principally worked with for the last couple of years, we're early stage lenders, I think, higher interest rates and inflation are squeezing the lower income borrower below 60 to 70,000. To make and reprioritize, their payment hierarchies, because food is so expensive, like basic staples of living, filling up your gas tank. And so what we've seen as the impact of this is that the 21 vintages, particularly second half of 21, for personal loans, credit cards are not good. They're the worst that they've been in a number of years, Subprime Auto has been deteriorating as well, and, and they have inflated car values, particularly used cars, because of the shortage of supply of new cars and ships. I think, in the broadening of the credit impact beyond just nonprime is we're going to see credit normalize by the end of this year early next into pre pandemic levels. So we're gonna likely have some type of recessionary period heading into 2023, which is normally in a mild recession, you'll see about a 30% deterioration in credit performance, an average recession lasts just under a year. So I think 2023 is going to be pretty tough. The other things that have happened in this environment are, like all the deferments and forbearances that occurred, which were the right thing to do for the customer. Due to the COVID problem, we have impacted score at to odd relationships, where credit scores, the traditional FICO, Vantage that everybody knows, in my opinion were inflated, because the payment has was deferred. And then there's been a proliferation of credit builder trades. And some of those product structures are good, like getting more people to report rent and utility payments, makes all the sense in the world, those are real payments that people making some of the product structures, in my opinion that some of the new banks have put together are brilliant for them in the sense that it allows them to earn higher interchange through credit products, rather than debit transactions. But the data that's being reported is almost all positive, because there's almost no credit risk in the way that the products are structured because they make the payments for the customer. Right, right. And so all of that is biasing scores, along with the difference, and part of the problem that has led to some deterioration in credit performance, is that scores were inflated, and it gave people a false sense of the credit quality that was really being originated. And last thing I'd say is, and I think people have pulled back and we're seeing tightening now. You know, the portfolio delinquency levels were so low for so many businesses and coming out of the expectation that COVID would cause this deep, deep recession. And all the great work, I think that was done by the government with enhanced unemployment and stimulus payments and, and the like, all the programs that came out of the Small Business Administration to help small businesses, that really helped. And so some lenders, I think, got a false sense of comfort, and probably in like the first and second quarter of last year, started to loosen prep. Right. And I think that contributed along with all the other things we've talked about, with why the 21 and early 22, vintages may have been worse than people expected.

 

Rich Alterman  17:29

So talking about the issue with credit scores and deferments, and changes in some new products like buy now pay later and credit builder products. We talked earlier about the use of banking data, open banking data, the pedal card company just spun off a new division called PRISM, where it's really focused on the use of open banking data, I think I read where they said they could approve for the pedal card approved 35% more consumers by using the open banking data, which is certainly helpful as the CFPB looks to the lenders, for more financial inclusion. Any advice or thoughts you would share with the audience? You recently joined the board of Plaid, and the robustness that open banking data can actually bring, especially in conjunction with a traditional credit report.

 

Kevin Moss  18:17

Yeah, so I'm an advisor with Petal as well. And, and I've seen, I've been working with deposit data for 20 years myself, even as a banker. So the proliferation of open banking and getting on average about a years of transaction data when you do aggregate through your deposit account or other accounts. I believe it's extremely powerful, and recently wrote an article with Alex Johnson of FinTech Takes. And the basic message from that was the Buy Now Pay Later trades, the credit builder trades, income share agreements for student lending, like these are all in my view, FinTech product innovations, that the Bureau's are not currently structured to support. They're basically forcing them into the traditional AR or installment or revolving type of product structures, when they're new product structures, right? The pain the pain for is not like any other product we've had and buy now pay later, the credit builder trades, they deserve to have their own trade line. Because right now, some of the trade lines I discussed earlier, are being treated the same way in these models as American Express trade law would be. So to me, the credit bureaus have to innovate the credit reporting to provide more granular data and trade line types. And that's not a simple thing. The thing about the aggregation data is it is granular. And so for those who, Pedal, which I'm a big fan of the Prisim product, what Pedal has done is it's really a two step process where we take this raw transaction data, and then create attributes or features from that, that could summarize income, the stability, the income, the cash flow, and other aspects of what we're seeing in somebody's checking account. And then models can be built based on the product experiences, and outcomes that we have just like with normal credit scores or other targeting algorithms, we can use those features in models to estimate the probability of default or the probability of being fraud or overdraft. And so my view is that 97% of the people supposedly have a checking account. And as we know, there's 40 to 50 million people in America that don't have credit reports, or if they do, because of the separation of nonprime credit reports as a separate clarity or factor trust structure that the credit bureaus own, they don't get credit for being in the main credit file. I think aggregation data has a huge potential to get many more people mainstreamed into the credit system. And I've seen standalone models that are as powerful as the models that we can build with credit bureau scores. And it's more up to date, because literally, if I aggregate someone's deposit account today, I see everything that happens to that point to this day, whereas credit reports are lag 30 to 60 days.

 

Rich Alterman  21:46

Yeah, so I'd be I'd be remiss if I didn't put a plug in for GDS, we do offer that capability to take in the bank data. And we're agnostic to whether it's flat or any of its competitors, and generate categorization and help build models. So certainly something we do as well, I want to come back to something you mentioned about some of the challenges and collections and rising delinquencies. And we work with a lot of personal loan installment loan companies as to you from an advisory perspective. And when I think about a consumer who's sitting there each month and struggling more and more to make ends meet. And they're having to make some tough decisions about which bills to pay this month. And we think about a personal loan installment loan, that really once I get that loan, the utility that that product brings to me, it's really not there. If I think about comparing that to a credit card, or auto loan where I can continue to drive my car, I can continue to take that credit card out and pay for products and purchases. So how does a lender that's offering an installment loan product? What are some suggestions you might give on how they can more successfully help prioritize the payment of their product, when that consumer is having to make a decision about whether they pay their credit card auto loan, versus having to pay that installment loan? Well, I

 

Kevin Moss  23:05

mean, first off, if you're a bank, or if you're a company like Sofi, or Lending Club, you hopefully you have multiple relationships with them. So first thing is consumers do if you have a good relationship with a consumer, they're gonna prioritize your payments. So a lot of it has to do with how you treat people. And so I think companies that have multiple relationships, in a deteriorating environment will have an advantage over single product companies for sure. Yeah, and I think the way you're gonna have to work with that is you're gonna have to segment your customer base, into from the people who are most in need of assistance to the ones who are very comfortable and, and can self cure on their own. And you're gonna have to work with consumers on providing relief, where they need it like, and one of the areas that I I feel very strongly that fintechs have not fully leveraged is the opportunity that consumer credit counseling non for profit Consumer Credit Counseling Services Office, I'm close with the NFCC, which is their national organization. I've worked on some projects with them. And like what most people don't know, the way to think about this, like the lesson I learned I ran the home equity business at Wells Fargo for four years during the last financial crisis. And the one thing I saw was that even if I charged zero interest, I could not modify my payment low enough to put people into the position of affordability. The only product that can do that is the mortgage product typically. So the power of Consumer Credit Counseling Services is that they can do almost like a customer level payment modification, where if they have a bunch of credit cards, what happens with personal loans? How do people run into trouble, a lot of times people run up their credit card debt, even after an attempt to consolidate it and pay it down. Because about 70% of the people they use case for a personal loan is debt consolidation. And so Consumer Credit Counseling has what they call debt management plans. And they're experimenting with some longer terms even. But today, they're limited to typically five years or less. And when they get a consumer into one, they lower the payments, five to 600 bucks. And there's two benefits that come out of this one is, hey, if I can get my borrower a lower payment on all of their other credit, or most of their other credit obligations, that's gonna free up cash flow for me. Right. The other thing that they do is they take a look at a consumers expenses. A lot of people need that kind of because they schools don't provide basic financial counseling, or you know how you run your financial life. And a lot of people run into trouble because they don't know how to budget, they don't know how to manage expenses. And so, so I think those are the two things that a consumer credit counseling, a non for profit agency can do. And it's totally underleveraged, particularly by the FinTech world, a lot of companies don't support them and use them. And I think that's a huge mistake.

 

Rich Alterman  26:36

Well, that's some great advice for the listeners today. And certainly encouraging to see that several states now are actually passing laws that require financial literacy as a requirement for graduating from high school. So we're kind of getting close to the end of our time. Today, I'm going to throw out one question to you, for the audience. And then what we'll call it a wrap. And maybe I could have you back again, I think we you and I could probably talk for about four hours. So I do a lot of career guidance, talking to friends, children with friends of mine, and what industries to look at, especially I always tell I was telling my friends, if their kids like math, that, you know, we always say that data is the new oil. And if they can really latch on to that, because certainly analytics is ubiquitous, really across any industry, every single industry uses analytics. So let me ask you a question. If you were talking to a rising college individual, or someone getting close to looking at graduation from college, and maybe 12 months, what are some of the things that you would tell them to get them excited about the industry that you and I have devoted our lives to?

 

Kevin Moss  27:40

So first off, the first thing, I mean, we put six kids through college, so I have a lot of experience in being a former college professor, like the first thing I tell people who are going to college is, it's an investment, you have to think about what you study, as preparing you to go out in the world to be somebody to be. And like, there are certain if you have the skills and capabilities, there are certain degrees majors that have much higher employability, and much higher income potential than others. And particularly the STEM majors are when people are coming out with those degrees, they're likely more employable at higher incomes. And so I would tell people think about your college education, just like you would think about an investment for the future. People who are just starting out, where you're you should be the biggest risk taker as the biggest risk taking part of your career. I think working in startups, and I love financial services, it's been virtually my whole career, and analytics and lending and credit risk, very actuarial, and very rewarding, because you're helping people achieve goals of their life, whether it's buying a home, buying the first car, like it's exciting. And so I would stress to people, you know, study the right things in school, make it a valuable experience for you coming out of there. And then search for companies that have missions that align with your values, and work with products that are important for consumers as well and businesses. Where we're financing is something that's important to growing the economy. And if your company is in the way that they're doing it in the way that they deliver, it is aligned with your own personal values, then that's the kind of career you want to try to pursue. Well, great. Well, I

 

Rich Alterman  29:51

appreciate that. Everybody we've been talking to Kevin Moss, industry leader in financial services, talking to us today from Calif Vanya, we look forward to maybe some future podcasts with Kevin. We wish him congratulations on his new role with Boston Consulting Group joining the advisory board at Plaid and I know he has a long list of other companies that he brings his experience and expertise to. So thanks, Kevin, I hope you have a great rest of the week.

 

Kevin Moss  30:20

Thanks Rich, and thanks for having me on the show today. Take care.