Behavioural Purchase Loan. Scoring based on behavioral data gives a chance even to people whom banks would not lend, says Ondřej Šmakal of Orka Ventures

• What are the advantages of outsourcing IT services?
• What hinders data sharing, and why does the state prevent it?
• What is unique about scoring based on behavioral data?
• What is the essence of data monetization, and what does it bring to practice?
• Will fintech companies replace the services of banks in the future?

Ivana Karhanová: A non-bank company lending in Nordic countries but based in Prague. It essentially outsources its IT department and has it delivered as a service. The scoring models for loan applicants are very fast, accurate, and based on behavioral data. In addition, they are introducing a "Pay Now, Finance Later" service. Orka Ventures and its CEO Ondřej Šmakal. Hello.

Ondřej Šmakal: Hello.

Ivana Karhanová: What is the essence of Pay Now, Finance Later?

Ondřej Šmakal: It's a standard loan with a different client approach. The client first has to make transactions on his account. This means that he buys groceries, a holiday, a frying pan, a washing machine, a dishwasher, or a TV, and then he withdraws the transactions he wants to refinance. The difference from a standard credit card is that you see what you've spent money on and choose the transactions you want to refinance, which should have an impact on your financial literacy or financial health - you're not just spending money and borrowing mindlessly, you're looking at the transactions you've made and refinancing those.

Ivana Karhanová: You do business not only in the Czech Republic but, as I mentioned at the beginning, in the Nordic countries. Where do you think the biggest difference is if you compare the non-bank market in the Czech Republic and Iceland or Denmark?

Ondřej Šmakal: The biggest difference is digitalization. Digitization and access to external data are very strong in Northern Europe. That's one of the fundamental differences. The second is the access of the customer as such. In the Czech Republic, when we have a problem, we don't pick up the phone, we don't talk to people, and we don't act proactively, which is a difference from Northern Europe. When they have a problem, people there want to solve it and welcome any help from the company.

Ivana Karhanová: Are you talking about customers who, for example, become insolvent?

Ondřej Šmakal: Exactly. When they default, they usually have no problem picking up the phone. They welcome the company by calling them and actively solving their problem with the company.

Ivana Karhanová:Access to data is crucial for the lending market. How are we doing in the Czech Republic with data sharing, for example, again compared to the Nordic countries?

Ondřej Šmakal: Well, it could be better. Access to the data that we need to do basic creditworthiness checks and then verify a client's financial or credit risk is complicated in the Czech Republic. Whereas in Denmark, for example, I have access directly to the tax office, where I can look at a client's accounts for the last year or their last three pay slips, in the Czech Republic, I do not have access to such data.

Ivana Karhanová: Does that mean the client gives you consent and doesn't have to send you any paperwork?

Ondřej Šmakal: The client authorizes me with a digital signature and a bank identity in the Czech Republic. The client's bank identity allows me to share his data.

Ivana Karhanová: And they don't have to send you three certified pay stubs from their employer.

Ondrej Šmakal: They don't have to send me anything. And that's the simplicity of sharing the data to use the service. Another example would be access to the population register, which is unprecedented in the Czech Republic. In contrast, such access is quite common in northern Europe - for example, in Iceland or Denmark. So again, through the client's authorized consent, I have access to the data that he has in his population register. Then we can talk about how broad that data is. In Denmark, it is common. In Iceland, it is a bit broader. And we can talk about the fact that I can use that data to reconstruct what his whole family looks like, whether he's in Iceland or out of Iceland. So even the sheer breadth of data available in the data source is different.

Ivana Karhanová: And the people there are comfortable with the form and the breadth of the data being shared?

Ondřej Šmakal: Sure, they are fine because, of course, they know that they would have to provide the data anyway. Even in the Czech Republic, you must provide it and bring your pay slip to the credit company. So what's the difference between giving consent through a digital signature versus having to print, scan, or send a PDF of that paystub? The only difference is that the CR opens up more room for fraud with that document. In Northern Europe, you have access to specific data, but generally, people have no problem sharing data because they see the advantage of a simple service. I can also have better pricing terms for that service. The Nordic-Baltic region sees this as increasing competitiveness and the availability of better services in the market because they believe that a service-based economy is better than a product-based economy or even more efficient in general.

Ivana Karhanová: Who is Orca's target client?

Ondrej Šmakal: We target clients who are not service banks. When we look at it from a credit risk perspective, it's the near-prime and sub-prime groups which are the groups that the bank does not serve because they have higher credit risk for the bank, and they take smaller amounts of money. Banks have to do the creditworthiness and credit risk processes on them anyway. And just like on mortgages, for example, it's just as expensive for them, just the yield on a shorter loan is lower. That's why banks don't service this segment. And according to research by PricewaterhouseCoopers or other UK lending companies, it is estimated that this group makes up about 45 percent of all economically active people. If we look at the EU, that's roughly 105 million people. In the Czech Republic, too, I have recently noted that this group represents about 30 to 35 percent of the population, so it is not entirely insignificant. These are people who are normally around us. They are not, for example, extremely indebted people, but people who, once in a while, take out a small loan to bridge some unexpected issue or expense, but the bank is not able to give them the money because they do not meet its criteria.

Ivana Karhanová: What are all the services you want to offer to these clients?

Ondřej Šmakal: Over time, we have found that not only do those forty-five percent of clients not have access to credit products, but they don't have access to other products either because they are very price sensitive. They have a tight monthly budget, so they look at the prices of services and products. But they want to use those services as much as the rest of the people. So, for example, affordable or short-term insurance is one of the products typical for this target group. It also includes deposits because these people may not only use credit but also save, put aside small amounts of money each month, and put it aside in a savings account. And we can all see for ourselves that banks and savings companies are not exactly offering interest rates that match inflation. And that's what we want to offer clients. So that if they behave economically or financially correctly, they are not penalized in some way. They have access to those services and are rewarded for behaving financially correctly, for example, in the form of interest rates on savings accounts.

Ivana Karhanová: You said that the banks are not serving these clients because it's not worthwhile because the yield is less and the processes remain the same. So what will be your economies of scale when you start servicing these clients or when you have started servicing them?

Ondřej Šmakal: The basic goal is to build a client base through the core product, which is loans and payment instruments. By getting a large amount of data, so certainly that additional revenue is in the monetization of that database because, after all, to offer a loan service to a client simply, we have to automate some part of that process, such as creditworthiness, where they don't give us pay stubs. Still, we download them by connecting them to an external source from the analyzed bank accounts. So one of those moments where we have a big broad spectrum of data on an individual - whether it's from the financial or non-financial sphere - that can then be worked with is something that is certainly an interesting contribution and revenue stream.

Ivana Karhanová: How will you be uncovering sales opportunities? Should I think of it as an event-driven approach to that client, where you can tell from the data that they've gotten into a certain life situation and could use additional products?

Ondřej Šmakal: Yes, you could say that. The whole company is based on financial transactions. We have a paycheck that we consume in some way. In the 21st century, everyone uses credit cards, and few of us use cash anymore. Especially in Northern Europe, cash is not used much. Society is moving away from it, so all the data about a client's financial life is probably in their bank accounts. A client may not have just one account, he may have several, and there you can read his consumer behavior, i.e., what he spends, where, and how often. You can then come out of the analysis of this data by giving them an additional offer for extra insurance, an extra discount, or a special offer to shop at a grocery store, for example.

Ivana Karhanová:You outsource a lot of your IT services. In the world of finance, that's not exactly a common move. So what made you do it?

Ondřej Šmakal: The basic motive is that you have to keep up with the competition in finance. You have to develop quickly. Technology is developing rapidly, and you have a broad technology base. We have an in-house IT team that takes care of the core system and develops the core functionality in combination with an external IT and IT team that covers needs like programming new functionality that is technologically different from the current IT solutions. For example, we can imagine having a backend, a standard web frontend solution, and we need to program mobile apps for that. If I wanted to develop my in-house team, I would first have to find specialists or IT coders in the field of mobile applications. Then, I'd have to train that team and do a lot of extra steps before they could technically start coding mobile apps, which is a big expense and, more importantly, a time expense that is not insignificant.
In contrast, if I hire an external company with experience with this, they can deliver the service to me immediately. So it's a combination of two IT teams. One takes care of the core system and develops the basic functionality; the other consists of IT specialists from external companies that we hire for any other technology.

Ivana Karhanová: Would you say you are more of a data company?

Ondřej Šmakal: Definitely. Fintech is actually about data.

Ivana Karhanová: And finance is there, by the way...

Ondřej Šmakal: Finance and products are data, too, because when you give someone a loan, you have to get a lot of analyzed data. So it's a lot about data.

Ivana Karhanová: Let's go to your vision now. That is to unify loans into one application in different European countries over different legal regulations. Nobody is doing that so far, or it's very difficult. What is the main barrier?

Ondřej Šmakal: I wouldn't say that nobody is doing it. Some companies will provide such a solution, but only for their brands. So, for example, we can look at a major credit company from Sweden that has brought together all of its credit companies from the countries where it operates into one model. And it then provides this credit module into solutions like e-shops or other mobile applications. But it's only available for its services and only in certain countries, where it's not too difficult to unify the process because...

Ivana Karhanová:That one is under one roof.

Ondřej Šmakal: Yes. We're going a different way because we've more or less figured out that we're able to bring together different processes from different countries. And suppose we can do different processes from different countries for our group. In that case, we can get other players across the European Union into this module because the basic assumption is that we have plus or minus the same process that the European legislation gives us, and that process is implemented in each country. So we can standardize that process, but we are willing to implement it in our module to external players that are not under our roof and offer it to other companies to use.

Ivana Karhanová: When we look at Orca in five years, what will it look like?

Ondřej Šmakal: It will have a big embedded credit module that will be offered to different enablers like credit card providers, e-shops, and so on.

Ivana Karhanová: So you will be in the background, and you will again take advantage of the data that you have.

Ondřej Šmakal: Yes.

Ivana Karhanová: You're just using scoring based on behavioral data. In your own words, it's unique. What makes it unique?

Ondřej Šmakal: If we look back at how loans used to be granted, one banker knew his clients in detail. He knew what kind of wife they had, what they spent money on, where they went to have fun, how many children they had, and how they were doing in school. And based on that, he was able to tell if he was a reliable person or not and decide whether to lend to him. We follow a similar style. We don't just look at whether the person has an income of ten thousand and an outgo of five thousand, that they can spend the difference on the monthly payment, but we also look at whether the person is mentally able to work with the loan at all.

Ivana Karhanová: And you can read all that from the data?

Ondřej Šmakal: Yes. It is extremely important to know not whether the person will pay on time or one day after the due date but whether he or she can pay and whether he or she is mentally able to handle the loan. I feel like many banks in the past didn't look at that at all. They looked purely at the balance. But now they're approaching it. For example, a friend of mine never had any credit and went to apply for a mortgage. And they told him: "Do you at least have a credit card so we can see how you're doing on those loans? So even the banks are slowly finding out that it's not just looking at what your income and your expenses are, and what difference it makes if you're even able to cover that monthly payment and pay it off if you have the mental capacity to work with that loan as a product. And that's what our behavioral model is looking at.

Ivana Karhanová: Let's give an example of how a client can mentally work with a loan, how you envision it and when they can't. What are you looking for in the data?

Ondřej Šmakal: What we look for is when a client takes out loans on an ongoing basis if they can pay them at all. That's the basic principle, apart from the fact that we can look at the amount of the loans or possibly the repayments if the client even asks for a repayment plan when he or she defaults or uses deferments. These are all examples of the person actively working with the loan, and if they are doing that, then they are a person who is mentally capable of managing the loan even when they might be in trouble. Well, but then again, if I look at the net balance, the creditworthiness, which is being pushed a lot now, that never tells me how I behave when I get in trouble or when I get fired from my job. The fact that I'm in a job after a probationary period and have that income and those expenses doesn't tell me whether I can work with credit.

Ivana Karhanová: Where do you see the future of banking and perhaps lending in particular?

Ondřej Šmakal: Although everybody is trying to limit interest rates, I see a lot of limitations of banking services in the EU. The EU will try to regulate us a lot. It will be a lot about supervision and regulation. There is now a regulation on the table that will cap interest rates in all EU member states. The question is how we will cap them. On the other hand, I believe that the trend is no longer driven by the banks but by fintech companies pushing a lot on data sources and working with data. So countries will open up a lot to provide data so that the banking or financial world, for the standard consumer, is accessible.

Ivana Karhanová: When we say data monetization, many people think of selling personal data, maybe misusing data. What do you see as the biggest benefit of monetization?

Ondřej Šmakal: It's not about selling any personal data at all. Data monetization is about analyzing the data over that client or that individual case and finding the most appropriate products and services for that client that will allow them to save on their monthly costs or improve the quality of service. And of course, the company then gets some revenue for providing those services, that's clear. But it's not about selling data, for heaven's sake.

Ivana Karhanová: What do you think are the real obstacles to the further development of fintech services?

Ondřej Šmakal: It's regulation, or the state's willingness to share data. You mentioned at the beginning that we do business in Northern Europe. There, the willingness to share client and government or other organizations' data is high because they have the experience. They have realized that if they share the data, they will, in turn, create a better environment with better services and products. They will create a better competitive environment that will attract other players to the market. That's how they understood it in Northern Europe. We in the Czech Republic are not going in that direction yet. Everyone here is terrified of data theft, abuse, and selling. But that is not what this is about. So the main obstacle is on the client side, who needs to realize that by sharing more data about themselves, they will get more benefits and advantages from it. And also, on the side of the state, sharing data or allowing data to be shared easily will create a better competitive and competitive environment and attract more players into the market and, therefore, more taxes.

Ivana Karhanová: To what extent do you think fintech companies can replace the services of banks in the future?

Ondřej Šmakal: I think fintech will play a big role in the future. Theoretically, banks may take a back seat and play the role of a white-label partner.

Ivana Karhanová: Does that mean that they will be, in a positive sense, shell companies that will play a certain role in the regulatory business and then offer fintech services?

Ondřej Šmakal: Yes. If I look to the East, for example, in Asia, some players there have already understood this, and Whitelabel banks are emerging, or standard banks are turning parts of their operations into Whitelabel services, which then provide services between the client and the bank. Most of the time, it's a fintech that can better target that client, they can work more dynamically with that client, they handle the marketing and customer service, and they take a lot of costs and hassles away from the bank that the bank doesn't have to deal with, but they get the same return. So it's also beneficial for those institutions, for those banks.

Ivana Karhanová: Says Ondřej Šmakal, CEO at fintech company Orka Ventures. Thanks for the interview and for coming to the studio.

Ondřej Šmakal: Thank you for inviting me.