How open banking and machine learning are shaping modern finance with Patrick Brett

Patrick Brett (Managing Director Strategic Venture Investing,Citi SPRINT) explores how open banking, innovation, and lending-as-a-service promise to bring better, smarter banking services. Inspired by international archaeological exploration, he shows how developments in emerging markets help us peek into the future of finance in Europe and the United States.  

I’ve been in banking for over 20 years, but I trained as an archaeologist. I love the hunt. I went on my first dig when I was 16 after I saw an ad in a magazine: Dig for neanderthals in Spain. 

So when I joined Citi, I really thought I might only stay a few years. I wanted to work internationally, to live in Argentina, to go on archaeological digs around the world. And my first role in US municipal bonds seemed pretty unlikely to lead in that direction.

But by chance, there was an opportunity to bring our municipal department global to Europe and Asia. And then work on projects like bringing Japanese bullet trains to Texas, with Spanish operators. I worked with different governments, and got directly involved in shaping domestic and international policy.

For my masters thesis, I overlaid declassified CIA photos and local aerial military photos with topographical maps, to map out this lost city in the Bolivian Amazon. I see the same deductive reasoning and logic in financial technology, especially as artificial intelligence emerges.

Today, we’re connecting fixed income disclosure information with machine learning. And finding endless other ways to modernise and augment classic lending systems.

This mix of new technology with timeless processes is so exciting. And it’s happening in what is largely seen as a period of retrenchment in the Fintech market. 

Innovation is fuelled by limitation

The cost of money today means businesses in virtually every industry have zeroed in on operational efficiency. But this has been a trend in banking for the past 15 years. 

At Citi we're investing and hiring the right talent to improve processes—to take out manual steps and make things more efficient. 

And this focus on leaner processes is accelerated by new tools and trends. We already have all the enabling technologies to make banking and lending as streamlined and seamless as it ought to be.

With that in mind, here are four banking trends I’m watching closely. 

1. Open banking continues to be led by emerging markets

Open banking is incredibly exciting. It’s creating data sets that were previously only accessible to one bank at a time, and even that one bank likely wasn’t using it to its full potential. 

Now, borrowers can give access to accounts and data sources that banks can use to underwrite much more efficiently. And that access to and use of data changes everything. 

We often think of technology as the catalyst for change. But in banking, it’s also governments. Because open banking is shaped by regulations, it happens at a different pace in different countries. 

And the fact that markets move at different speeds lets us see into the future. What happens here could potentially happen there in due course. 

India is one of the most open banking ecosystems in the world. With government support, they’ve built almost everything you’d want for digital banking infrastructure. The global industry is watching what’s happening there very closely. 

Brazil is way ahead from a payments perspective. And Europe is too. By contrast, the United States tends to move cautiously on the consumer side. It requires a level of consensus at the federal government level to create change, and that just hasn’t been there. The market is also just too big and too complex to be a first-mover in this area.

But the markets are all moving towards more access to shared data, and better, more efficient services. Balanced with consumer protections and rights, of course. 

Banks in every market need to work with regulators and keep communicating the consumer benefits of open banking. We all want to build the best possible services, and open banking is key to that.

Let’s learn from what’s working internationally and design fair, flexible financial regulations for better banking. 

2. Technology is already overhauling debt financing

The enabling technologies that have come online in the past five or ten years are very exciting for debt underwriting. The important information for underwriting and credit often resides in unstructured documents — both for consumers or institutions. For a single loan that could involve hundreds of pages of scanned documents. 

Machine learning can extract and structure the important, relevant information from all those unstructured original sources. And it does it with lower error rates, making it much more robust. 

The potential to summarise and analyse all that information with large language models, and compare across different credits to evaluate risk more efficiently, is very exciting. And that’s true across pretty much all credit origination markets. 

Machine learning is an essential tool now. Especially in credit. There’s more standardisation in equity. In public companies, everyone owns one or two classes of shares, and they’re traded on a public exchange. 

But there can be so many different credits even for one company or issuer across legal entities, asset-backed financing, SPVs. And even within a single obligor, varying terms across different debt contracts, some of which come into play only in different pre-defined states of the world. You really have to read through everything to understand the interplay between them.

Just to originate a new credit is hard. But if you then want to trade them, or provide liquidity to them — which is a very important input into the cost of credit — you need people to be able to quickly form a view on it. That’s just not possible when key terms are buried in hundreds of pages unstructured documents. At the very least, it’s hugely expensive.

So these new processes that give us a quicker take on a loan or bond are really critical. 

3. Banks need to embrace lending-as-a-service

Nearly 20 years after the financial crisis, there are still plenty of inefficient processes in all banks, especially related to lending. Which present real opportunities to work with fintechs.

There’s always a temptation for banks to try to build things on their own. But in many cases lending-as-a-service partners are already there, and can often work better than the tools banks would build. These services can have a much lower cost, and do it in a really client-friendly way.

Just the speed and simplicity of some of these providers is incredible, especially compared with what we’re used to in business lending. This has two big advantages: 

1. You can handle existing client relationships more effectively, starting with one key area: short-term lending. You can then expand much more easily. 
2. You can confidently grow your client base with minimal operational difficulties. Thanks in large part to the AI developments we saw above.

Ultimately, banks can refocus the spending that was going to lending operations into higher-margin activities. 
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How do you choose a partner? 

First, you need a clear business case. What’s the problem to solve? And based on the above, I think the case is pretty clear. 

Then you need to look at information security and compliance with regulatory standards. Bringing a new partner into a bank is always going to involve a long onboarding process - three-to-six months or more. So you can’t even start that process if you don’t think the partner will pass in the end. 

For example, Defacto has a French banking licence. That’s a high bar to clear, and you know that the work has been done to ensure things are compliant and well-managed.

• ‍Want to offer a best-in-class credit journey to customers? Learn more about Defacto Core.

4. Better services are coming for consumers (borrowers)

These AI tools and fintech partnerships are clearly good news for banks. Most crucially because they let us offer far better experiences to clients. 

They’ll be able to borrow more quickly. They’ll lose less time shopping around, and far less time getting onboarded. Fewer forms and face-to-face meetings, mostly thanks to that interplay between open banking and AI underwriting. 

It should also mean less administrative effort throughout the relationship. A tech-enabled lender gives you more real-time information about your loan balance and how it’s performing. 

And all of this leads to lower lending prices. It’s a competitive market, so the more lenders can reduce their spending and increase margins, the more they can pass that on to borrowers. A good amount of it, at least. 

Those lower costs will also bring broader approval. We’re able to underwrite businesses that would have been much harder in the past. The market is already becoming more inclusive.

But again, it’s incumbent on the banks to make this happen. There’s a clear competitive advantage to going live with these enhanced services as soon as possible. 

What this means for lenders

Small business lending is a real need and providers have existed for years. But at a macro level, looking across the entire economy, that capital is being distributed pretty ineffectively, and with all the inefficiencies in the system, it’s more expensive than it should be. 

So I’m excited about what fintech innovation can bring to banks and other traditional lending providers. 

For example, Defacto has identified fixes for the most costly and onerous parts of the process, and are showing impressive results with their partners. It’s considerably faster and far more cost effective to provide financing. And arguably ensures more compliance.

It’s really a great example of how specialised fintech can plug into and improve on traditional banking services, and everybody wins. 

The banks win, the regulators win, and the customer wins most of all. 

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About the author

With 22 years of experience at Citi, Patrick Brett is a debt capital expert and Managing Director for Strategic Venture Investing. His passions for archaeologyand global cultures help frame the way he sees technology reshaping lending markets. Patrick is also on Defacto’s board of directors as Citi Ventures is an investor and Citi Global Spread Products (in partnership with Viola Credit) extended a €167 million securitization fund to Defacto in July to finance additional SMB loans across Europe.