Scratching our own itch
In the spring of 2017, when we were just starting to build Inkredo, with the idea of contributing to greater financial inclusion in the country, we had no realization of the challenges that awaited us. We first worked with mobile phone sellers who sourced and sold Chinese made smartphones priced under Rs. 10,000 and facilitated loans for them based on their invoices and bank statements. While helping them seek loans, we found that analyzing bank statements was a tedious and manual task and took up a tremendous amount of time. We found a few online solutions, but none were willing to integrate with a small player. With the few that finally agreed after negotiations (not on price!), sharing the access to their test environment and of required API documents took a lot of time because every step involved an NDA. Moreover, none of these were simple, fast or cost-effective; quite a few were charging hefty upfront fees. This made us think and come up with an easy, low-cost and reliable bank statement analysis tool, that would cater to emerging Fintech companies.
So, what is bank statement analysis?
Bank statement analysis is the analysis of the financial transactions of borrowers i.e. outflows or debits and inflows or credits over a period of time, based on their bank statements. Everyone has a bank statement, a universal document that contains all of their transaction histories. A bank statement is unequivocally the most valid record of one’s income and expenses and gives a fair view of one’s financial health. It contains their transaction history for a specified period of time including all sources of income, EMIs, expenditures, withdrawals, credit card payments, receipts, and interest earned.
As we know, banks are in the business of lending and borrowing. They earn interest on loans and pay interest on deposits. The difference between these two is called their net interest income or spread. Now, lending is their primary source of revenue. Therefore, banks spend a lot of their resources on assessing if a borrower is worthy, i.e. if the individual or business has the ability to repay the loan. This brings us to the question — How does a bank distinguish between worthy borrowers and the not so worthy ones? They verify credit scores, sources of income and thereby employment, and most importantly, collateral and KYC details, through stringent and comprehensive processes.
What does bank statement analysis tell us?
Bank statement analysis delves deep into bank statements and parses the data from pdf statements to derive meaningful insights about a borrower’s recurring transactions, loans and defaults (if any), income and its frequency, and repayment capacity.
Sounds simple and easy, doesn’t it?
But it isn’t. A large section of the world population is still without a formal credit history, and without fixed assets for collateral. This section has been deprived of credit for decades and they outnumber those with access to formal banking channels for availing loans. They are susceptible to falling prey to unorganized money lenders who give them loans at sky-high interest rates. When we checked, we found that a few money lenders were giving out loans at 7 to 10% per month, while a few payday loan providers were charging anywhere between 0.5–1% per day — that is a whopping APR of 180%!
Consider this — if a formal institution could extend credit facilities to them for meeting their needs at a lower rate of interest, it would be a win-win for both FIs who would get access to this untapped segment and deprived borrowers would get access to cheaper credit. This untapped potential has made Financial Institutions (FIs) rethink their strategies and move from asset-based loans (i.e. collateral-based) to flow-based loans. Flow-based lending takes into account the recent transaction behavior of an individual or business to assess their repaying capacity. What better way than a bank statement that has all credits and debits of an individual or business for a given period to assess recent transaction behavior?
Let’s list down how bank statement analysis can prove to be a viable alternative for all:
- In the case of individual borrowers, bank statement analysis helps in income verification and spend analysis, i.e. gives a complete picture of their income and expenditure based on their bank account.
- For businesses, bank statement analysis gives the cash inflows from customers’ payments and cash outflows based on payments to vendors.
- The status of customer cheques in terms of whether a cheque got cleared or bounced can be deduced from bank statement analysis.
- It is an easy and effective method for the reconciliation of customer payments.
- Bank statement analysis reveals events of non-payment and default or insufficient funds. This is crucial to the assessment of the creditworthiness of both individuals and businesses.
Challenges of bank statement analysis
The contents of a bank statement are neither uniform nor consistent across banks. They are full of non-standard abbreviations and narrations and each bank has its own format of presenting these details. For instance, if you look at the statement formats above, the account balance table has different headers or names in the different formats. The column number for account balance is different in the different formats. Some have currency mentioned right next to the balance, while some formats don’t have it. In a few formats, you may note the abbreviation “Cr” which denotes crores right next to the numerals, while some have only numeric values.
So, what’s common between these statements? All of them belong to the same bank. So bank statement analysis isn’t a simple and straightforward parsing of pdf data to excel or any other desired format. Imagine, for example, statement formats in a country as diverse as India. There are close to 500 banks in India and each one has multiple formats and layouts of statements.
Bank statements are collected from the borrowers at bank branches or collected by field agents and analyzed at the back offices of the banks/FIs. File formats of bank statements have also undergone considerable changes, from scanned images of statements to system-generated PDFs to now XML files. File sharing and file formats are the tips of the iceberg though when it comes to dealing with the challenges of online bank statement analysis.
Now, think of the number of countries in the world and the number of banks each one may have, each with its own narrations and abbreviations in statements. Banks in urban areas have at least a dozen formats. That could give you an idea of the scale of the problem we have at hand. A bank statement analyzer must be able to handle all these variations, analyze data and provide meaningful insights to support decision making with the highest degree of accuracy.
Currently, Public Sector Banks rely on bank statement analysis that is largely offline, employing hundreds of employees who transcribe the data scattered across pdf statements into excel spreadsheets. This pdf to excel conversion is prone to errors and delays since copying data from pdfs is never easy. Especially copying tabular data from PDFs is cumbersome because the tabular structure of data loses its fidelity while copying, and looks like plain text. Imagine the sensitivity of the data and the level of accuracy required to do this for hundreds of pages of statements several times over in a matter of a few seconds.
Parsing PDF data thus is an extremely challenging activity. Consider having to do this activity for scanned images. Though there are various pdf parsers such as OCR readers available that can parse pdf statements, most OCR readers are not “intelligent” enough to identify such unstructured data. Also, there is no authority at the lenders’ end that can perform a check for fraudulent data provided by borrowers or assign scores for defaults and negative end of day balances.
Not the most efficient way of doing things, right? And, not at all scalable.
Fintech companies are great disruptors in this space and have come up with cutting edge technology products for bank statement analysis. Private Sector Banks are collaborating with them to resolve the issue of financial inclusion to the unbanked. Inkredo also offers an online bank statement analyzer that’s free of any upfront charges and performs analysis of hundreds of pages of bank statements instantly, facilitating faster decision making at low cost. We handle more than 50–100 different statement formats, validating data to prevent frauds and providing a 360-degree view of a borrower’s financial well-being.
Benefits of bank statement analysis
- More automation and less manual efforts: Online bank statement analysis also makes the manual collection of bank statements redundant, making it beneficial for both borrowers and lenders. The turnaround time for the processing of loan applications is significantly reduced if automated bank statement analysis is adopted.
- Better assessment of risk: It also helps lenders assess other liabilities of the borrowers including existing liabilities and recurring payments that may have an impact on their ability to repay the loan being applied for.
- Reduction in costs: For a process that is manual, with hundreds and thousands of employees working in back offices of FIs or KPOs, the single biggest factor is escalating costs. Automation goes a long way in reducing those costs.
- Catering to the unbanked: From providing loans to individuals who have otherwise had no access to credit since they lack conventional documentation for employment and income to Micro, Small and Medium Enterprises (MSMEs) which lack sophisticated financial reports and collateral and are highly vulnerable to seasonality, natural calamities, sudden variations in input costs, changing regulations and various other factors; bank statement analysis provides an accurate and almost real-time assessment of their financial health. Flow-based lending, backed by robust and solid bank statement analysis, also has the potential to transform rural credit: providing a solid foundation for loan underwriting and insurance underwriting.
Bank Statement Analysis gives a holistic view of a borrower’s complete transaction history, parsing pdf data scattered across hundreds of pages, into a meaningful and coherent picture of their creditworthiness.
The road ahead
Automated bank statement analysis has improved turnaround times (TAT) drastically, to the extent that several hundred pages of statements are analyzed instantaneously. The only step that remains manual is: borrowers having to upload their pdf statements or scanned statements after receiving them from a bank branch or from their online banking portal. Real-time bank statement analysis could be the next innovation if Open Banking APIs become available for widespread use. With Open Banking APIs, the loan originator, through the common interface which has all the banks enlisted, can digitally source bank transaction data directly from the applicant’s FI. The data would be processed instantaneously, enabling the FIS to arrive at smart lending decisions in a matter of a few seconds.
Sahamati, a Collective of Account Aggregator ecosystem in India is one such initiative. A borrower’s data is spread across banks, telecom companies and healthcare providers in isolation from each other with no common framework where the data pertaining to an individual or entity can be aggregated for sharing as per requirement. Sahamati proposes to solve this problem by providing a digital platform where data can be easily shared and consumed, based on the user’s consent. If you are interested in sandbox testing for Sahamati please write to us at the email address mentioned below.
This post was originally published on Medium by Swati Suramya.