998. Insights: The new rules of underwriting - Live from Money20/20 Middle East

0:00Class it up with Crocs. You know back to school is coming in fast. So why wait to find your new Fave footwear? Step into a local Crocs store and step into your new look. Try it. Style it. Make it yours. Because the right pair doesn't just show up. It shows off. First day fits, handled. Walk out ready for whatever's next. Visit your nearest Crocs store today. When you need to build up your team to handle the growing chaos at work, use Indeed Sponsored Jobs. It gives your job post the boost it needs to be seen and helps reach people with the right skills, certifications and more. Spend less time searching and more time actually interviewing candidates who check all your boxes.

0:46Listeners of this show will get a$75 sponsored job credit at Indeed.com slash podcast. That's Indeed.com slash podcast. Terms and conditions apply. Need a hiring hero? This is a job for Indeed Sponsored Jobs.

1:13Hello and welcome to Fintech Insider Insights in partnership with Adolfi, live from the very first Money 2020 Saudi. I'd love to get a show of hands from people outside. Can you show of hands? Who's listening in? Yeah, you're listening in. One, two, three. I've got loads, loads of... So for those of our listeners who are not here, we are sat very close to an extremely large duck, which is kind of interesting. We all have ducks on our table as well. So this is very much a duck theme. We'll try and weave that into our discussion somehow. We're going to do some lending to ducks somehow. But nonetheless, I'm David Barton Grimley, FinTech Strategy Director here at 11FS.

1:51and we've got a very special live episode coming up for you today. We are diving into a critical and fast-evolving frontier of financial services, and that is the future of underwriting. So where consumers, SME, and data collide. And I think it's particularly exciting being in Saudi and being in the region. It's a huge theme for everyone here. I've certainly been picking up on that in the Money 2020 conference. But here's the twist. In today's digital economy, SMEs don't exist in a vacuum, right? They sit between consumers and banks, often serving one and being served by the other. As such, banks and BNPLs increasingly find themselves holding different parts of exactly the same puzzle.

2:33So today we're going to explore the potential of transactional data, particularly things like real-time cash flow, to offer a more dynamic and accurate view of a business's financial health. And we'll look at how leaders, fintechs, BNPL providers and banks can share intelligence to serve SMEs better without compromising on risk or compliance. So we'll be looking at the shift from static risk models to dynamic flow-based underwriting, how banks and fintechs are partnering to build infrastructure that scales trust. But before we get to that, let me introduce you to today's wonderful guests. And first off, we have a Fintech Insider debut for Salman Akhtar, CEO and co-founder of Adolfi.

3:09It's great to have you on the podcast here in Saudi, Salman. Tell me a little bit about Adolfi and your time. How's the conference been going? Sure, thank you. And great to be on the podcast. So Adilfai is a lending infrastructure company. And what we've done for the last four years is, first of all, building credit models that work on bank transactional data. because we took a view that for alternate data scoring, this was the sort of gold dust that you could rely on to score those hard-to-score segments, people like SMEs, people like non-salaried customers, people like thin-to-file. So those are the segments that we score and work with our lending partners to enable lending.

3:57And one last piece of Adilfai is that You know, we have this shared revenue, shared risk model. So we literally stand behind our models and we will share in the risk along with the revenue that is earned from the loan that goes out. So far, money tournury, actually totally beyond my expectations. So this has been great. We've had a lot of very interesting conversations. The stall is, you know, a lot of people come by our booth. and it's really been actually way beyond my expectations yeah that's awesome i echo that as well thanks super interesting um and we have another fintech insider debut for waleed hasuna ceo at value welcome to the podcast waleed tell us a little bit about yourself and value okay thank you very much i'm so glad to be here with you in the podcast and also so glad to be in saudi um with the first my 2020 conference um i'm a banker so i started my life as a banker Most of the fintech players, they started in tech.

4:59So I started in banking and I was doing a very different thing than what I'm doing right now. I used to be the head of that capital market for multiple investment banks. So I was actually raising a lot of money for very big corporates, whether this is direct facilities, sukuk or bonds and other things like that. And finally, in 2016, I was part of the EFG group. I was heading DCM. I was heading NBFI. and we wanted to start a consumer finance business. This is how value started. So we were not a real startup, but actually it was a corporate innovation within the EFG world. What we do is that we underwrite customers for credit and we have the best of the two worlds.

5:42We are very fast as the buy now, pay later, but we can offer you solutions from$1 to$1 million. So basically we're not focused on a certain segment nor sector. So we can do grocery and we can do boats and yachts. We started in 2017. We were the first player in the Middle East to be called as buy now, pay later. Although we weren't, but we were the first one to have this term in Egypt and in the Middle East. And we haven't raised any money except$10 million from EFG and another$10 million came from Amazon. They invested in the company in a convertible in 2022 and they converted this year before we go public.

6:27Now we're a public company, market cap is around 360 million dollars. We have a million plus customers, which is very big in Egypt compared even to the banks. We are the third or fourth biggest bank for a number of customers. And we have more than 12 products. One of them, of course, is funding our merchants. So we've been into SME, we've been funding our merchants for a long period of time. and now we're getting license to provide sme financing across egypt and our next market is going to be jordan amazing amazing what an incredible story and such a such a huge company that's so cool welcome welcome on the pod um and finally we have another debut on the podcast for abdullah al-moyed founder and ceo of tarabut great to have you with us abdullah please introduce yourself and tarabut for our listeners pleasure it's great to be here um this is home turf for us so it's great to see everybody that we know and have been in contact with for a while and visit us here and see what's actually happening on the ground.

7:21Just a brief on Tarabut, we are an embedded finance and open banking platform. We leverage open banking and open finance to help lenders unlock new opportunities. What we say internally is we help lenders unlock, understand and serve new segments that they don't currently do. This is typically leveraging open banking and other data sources that are available. I think to me, having been in London for a long time, we also acquired a company based out of the UK. We know the markets globally pretty well. We're operational across Bahrain, the UAE, Saudi Arabia and London. But it's great to see people's reactions when they see what the infrastructure is like out here when it comes to alternative data.

8:08So something we're very closely monitoring and we're working alongside. We typically serve banks and lenders. That is what we do. Again, as I said, helping them unlock, understand and serve their customers or new segments of customers better. That's amazing. All right. Let's get into it. I mean, I think what's very cool about the three of you is you each represent a different part almost of the value chain and also different geographies. So we've got a really good spread of opinions and everything like that. So Samana, I'm going to come to you first. And I suppose the thing to set the scene for our listeners, very international audience we have, is like, what's the tension?

8:42What's the problem? Why can't SMEs get the lending? Why are we still in, it's 2025, right? Fintech's been going on for a long time. What's the tension? What's the issue? Where's the opportunity? So SMEs are just notoriously difficult to score for many, many reasons. Obviously, the fundamentals of credit scoring, as they apply to consumer lending, and, you know, the S part of SME kind of bleeds over into consumer lending. You know, the numbers are of the same order of magnitude. So the fundamental premise of lending and scoring on the consumer side is stability. Income stability, spend stability, repayment stability, etc.

9:26etc. SMEs, and especially the S part, are really characterized by instability. There's a lot of variations, seasonal variations, you know, sales variations up and down. So they've always been extremely difficult to score. And one example of that is that the US, which is, you know, the most sophisticated credit market in the world, even over there, the S part of the SME, the statistics from the Fed is that about 30 to 35 % of all small borrowers in the US have to rely on personal credit cards. They do not get access to credit. So that just tells you a measure of the problem. Now, of course, as we all know, every country in this region is really trying to push the SME agenda, you know, across the whole region.

10:15And the problem is that the scoring or the risk analytics really is historically not been fit for purpose. So that's been one large part of the gap. The capital is there to be lent. It's just that it doesn't know whom to lend to. And that's to my mind been a big part of the problem. And that's the big opportunity. I mean, Waleed, how are you seeing this in Egypt from a BNPL perspective? So Egypt actually has a lot of unbanked customers. And even if you look at bank customers, you will find most of them with no credit history. When we started, we wanted to disrupt a very simple thing. We wanted people to get credit and get it right now.

10:54And we were only competing with banks or brick and mortar financing houses. Banks until now, they think that the most important part that they have on lending would be credit cards, because this is where you can split payments on three, six, nine, 12 months, what we call an EPP. And the problem is if I'm in 2017 before value has come to the market, If I want to buy an iPhone, if I want to do a surgery, if I want to pay for education, I need to issue a card. And issuing a card will take until now around 20 days. Between underwriting, documentation submission, review, issuing a card, activating the card.

11:34And of course, it's plastic, so you have to issue the card. When we came in, we were just thinking about if this is going to be the case, then the customer would never make an impulse decision of buying or will never be ready when emergency is needed. So we wanted to make this happen in, when we started, it was like 45 minutes. Now it's like three minutes, but now it's 100 % digital. When we started, we couldn't do 100 % digital because the e-signature and EQIC was not working in Egypt. and now we have an option of 100 % digital that we just launched today with noon in Egypt but still customers, they want to physically come to us.

12:14So we're still going to have this physical locations but now it takes around three minutes to get on board. And the question was how we're going to build a credit scoring system on customers that might be unbacked. And we were very realistic on that so we decided what we're going to do. Okay, let's build the credit scoring, the instant credit decision only for customers with credit history. And this might look like a stupid decision because we don't have open banking tools. We don't see transactional data. But we said, this is the best way to get our model to learn. So let's do it. And we established a rule engine that worked on whatever available in the credit bureau and make a decision in seconds.

12:53When this worked for us, now we want to get to the unbanked because if we keep competing with the bank customers, this is a very limited pie to work on. And the problem is if we continue doing this, then our cost of fund is always going to be hard at the banks. And if the banks improve their underwriting, then there is nothing to offer to the market. So we decided we wanted to do the unbanked and we started like every other player who wanted to do unbanked at this time. We got into surrogate programs. So what car do you have, where do you live, demographics, things like that. And this, of course, was not efficient enough.

13:28So we decided, okay, why don't we underwrite 50 ,000 customers for very small limits? People that we usually reject that don't have credit history and we don't know why we reject them, but reject them. And then we created all the data and started to use AI and underwriting methodologies through machine learning and other things to decide on customers. And we were doing this with a lookalike. So if we have a banked customer that we have underwritten two years ago with certain features, We compare this to our new customer who's just knocking our door and see the feature importance and decide on those customers.

14:04Now we're able, not now actually, two years ago, we were able to launch what we called our Rule Engine 2.0. And our Rule Engine 2.0 was able to underwrite customers seamlessly for banked and unbanked customers. Our current acquisition is 60 % unbanked customers, 40 % banked customers. This is our current acquisition. Our portfolio composition now is around 50-50. And we are moving more into the unbanked because we're able to underwrite customers without the need of having all the data that we used to have before. Also, the infrastructure in Egypt is not helpful enough. So we cannot get data on, we don't have GoSee, for example, like in Saudi.

14:45We don't have any data on customers, how much money they make and how it works. So what we do is that we underwrite the customers and then we use our spending data habits of those customers on our platform and feed this back to our system and try to understand if we underwritten the customers right or wrong because basically we don't have enough data so we're trying to use our own data as a way to underwrite customers again and again and again and this continues to happen every day you have to take a little bit of risk you're giving a little bit of risk saying hey we're going to give you a little bit of risk we took high risk yeah but now our our performance is very good our default rates are below one percent which is compared to the national average in egypt which is six percent is really amazing and we're now giving our giving some banks that we work with underwriting as a service for the credit card issues right i want to bring you in on the open banking perspective because so much about what both of both of the other guests have been talking about is about data sharing um and and how what is the role of the infrastructure in in all of this so a few things and i just want to go back to one of the points that the colleagues did or made.

15:53This market is very, very, very different than what was just mentioned. And I would argue that the U.S. is not the most sophisticated market out there. And there's a few points to back that up. Let me just draw out a picture for a second for everybody here. Imagine everybody in a country having a digital identity. Imagine electronic signature laws being enforceable by law Imagine having the cloud mandatory to every operational bank or fintech or data holder Imagine APIs being standardized across an entire ecosystem and then imagine a judicial system that is digitally enforcing through APIs alongside promissory notes at the point of lending.

16:50Wow. That is what Saudi Arabia is today. We talk about unbanked or underbanked. Saudi is not unbanked. Saudi is multibanked. Everybody in Saudi Arabia has more than one bank account. which means that when you lend be it an SME or a person the question is where do you get that source of data from it could be from the GOSI the general organization for social income it could be from the bank transactions it could be revenue-based financing but the identity and the KYC and the KYB and the onboarding is all completely digitized. Right, that's taken care of. That's all taken care of. So what that means is from a lender's perspective, and I agree to what you were saying earlier, is our role is to start advancing these risk-adjusted models that allow us to serve these customers better.

17:49So what we strive to do at Tarabot is not really serve the underserved, but we're one chapter ahead. what we want to achieve is intuitive financial services, is where the user's requirements are predicted before he actually needs them, or when lending is actually pushed towards them to say, hey, you're already approved for 300 ,000 riyals, would you like to go ahead? Straight through processing is table stakes here, right? Straight through processing is completely table stakes. because what has happened is the government is ahead of the financial services sector. So let me give you an example.

18:30A few days ago, Tamara just announced$1.4 billion backed by JPM, Apollo, and Citigroup, I think, or something like that. Well, there is a reason they're putting their money here. The reason is, is because this debt portfolio has so many parameters available to them that are not available in other jurisdictions, which means when you price it, this is a very, very attractive market where enforcement gets digitized. If you default on a payment, credit, I mean, there's a lot of prerequisite work that has been done, which makes our job as technology players a lot easier. So the parameters or the data fields that we have.

19:17So we always say, yes, we're an embedded finance player. Open banking is just one of the attributes that we use to be able to leverage transactional data and do that. But the reality is, I'll give you another example. And people tend to think, by the way, open finance, financial inclusion is for the bottom part of the market, microfinance, BNPL. I'll give you a very simple example. We built a product with American Express. American Express Centurion cards. Guy's in New York going out shopping, calls up Amex. He's like, hey, by the way, I need$250 ,000. I'm about to go shopping. They pull up his credit score.

19:55They have nothing. The guy is self-employed, owns his own company. The money's in his account, but he doesn't have a credit bureau score. He doesn't give himself an income. He doesn't give himself a salary, and he doesn't have a GOSI score. So how do you serve that part of the market? it. He calls up and American Express historically has been credit scoring people on the basis of their habits within their closed loop ecosystem, which is very similar to what you guys do. And here the guy is new, he's a billionaire and he wants a quick credit card. If they reject them, he's not going to bank with them anymore.

20:29So what do you do? And this is where open banking comes in. A guy calls up the call center, goes on the app, requests a limit. They ask him to do one thing. They pull the API from the credit bureau, comes out negative, the guy doesn't even have a credit bureau score, but they know he's good for it. Link your bank account. They see he has a deposit, he has a fixed deposit, boom, you get the credit limit. So it's also for the upper end of the market. And people tend to misconceive or misunderstand exactly where financial inclusion is. What we're trying to do is bring everybody in, not necessarily just the blue collar or the gig economy and things like that, but it's also being able to better serve the other segment of the market.

21:08Yeah, and that resonates a lot with what we see at 11FS, which is that the types of jobs, and this goes back to what you were saying initially, Salman, the types of jobs and employment globally are changing. You know, people are becoming a little bit more freelance, a little bit more transient, a little bit more international. They're moving across country. I mean, we see this so much in Europe and whatnot. And a lot of what you were saying, by the way, resonates to me in the UK. It comes down to UX, right? It comes down to that UX. It's all very well that you have the infrastructure and you have everything like that but what is the what is that sort of final ux and if it's not there then sometimes the customers do get underserved and there is there is propensity to loan yeah yeah and you know just to follow up on the comment that was just made i think it's because we're talking about lending the issue is not financial inclusion it's really credit inclusion and you could be credit excluded at any point in that entire kind of range of the population.

22:03You could be at the very top. You could be squarely in the middle and still be credit excluded. You could be at the bottom. Of course, the money is middle up because definitionally, the unbanked, the very poor people, you can only lend small amounts of money. So you can't make a lot of money of lending to those people. Nanocredit being one great example that really not a lot of money will be made over there. So the money can only be made if you can essentially lend long and lend large. That's where the money is. And coming back to the point that you were just making on the UX, so 100%, to my mind, the idea is really how quickly can you make that accurate credit decision?

22:47Is it one minute? Is it one day? Is it one week? If you're at the one week level, the game is over. You really need to be at the one minute level and I totally agree that should be table stakes across the board for everybody and there are ways of doing it even in less advanced economies you know as was just mentioned Saudi being a great example of a lot of the infrastructure being in place so for example some of the work that we've done in Pakistan where a lot of this infrastructure is not in place but we could see that we could do this to within banks to their existing population so we could do STP within a bank, one minute, disperse the loan, credit decide, disperse the loan, STP, boom.

23:33And that experience, by the way, completely changes your drop-off rates also. Because, you know, you come in, you apply for a loan and says, oh yeah, see you later. After two days, I'll give you a credit decision. You know, that whole thing that you just talked about, about, you know, the medical emergency or the impulse buy, you know, if you're going to take like even one day, the game is over. Does that make sense? Absolutely. By the way, just on that note, we're going to take a quick pause here for a quick break. Be back very shortly.

24:06This episode is brought to you by Google Chrome. You think you know a browser, but Gemini and Chrome? That's new. It can help you with practically anything on the web, like restoring a vintage motorcycle from a 50-page restoration block, or finally break down that long article you've had open for weeks. Gemini and Chrome is here for it. Ready to make anything online make sense? There's no place like Chrome. Check responses set up required, compatibility and availability varies 18+. This episode is brought to you by Facebook. So you were scrolling on Marketplace, and there it was, the bike you'd been searching for.

24:40You sent a message, and it turned out the seller was super chatty, kind of funny, and an avid cyclist. The next thing you know, you're in a cycling crew. Well, a community cycling group. The thing about Facebook, you might find more than what you're looking for. From a browse to a bike ride, this summer, find more on Facebook.

25:04Welcome back, everybody. So in the second half of today's show, we're looking ahead at what happens when underwriting becomes continuous, not static. We'll unpack what this shift means for lenders, SMEs, regulators, and consumers alike and explore how smarter infrastructure, AI and federated learning could reshape credit access across the ecosystem without compromising trust, compliance, or control. So I want to actually start off by picking up the point, I think that you made, Salman, about banks, right? And like a lot of what you do is working with banks. So I kind of want to open that up to a conversation about the role of banks in this.

25:39Because so far, a lot of what we're talking about is alternative lending. It's non-bank lending. It's outside. And Waleed, in Egypt, you know, where do you see banks participating in this? Because you're talking about filling a gap that they're not filling. Are they going to fill that gap in the future? I think in Egypt, it's very different. So we don't have the infrastructure of Saudi. we don't have the interest of the investors as much as Saudi because Saudi has the infrastructure the legal structure and everything so we need to work with banks so are fortunate enough I don't know if this is something good or something bad but when you look at it in Egypt we had access to bank debt when we started normally buy now pay later consumer finance are not getting access to bank debt on the spot here and in UAE for example they need to prove themselves first but in Egypt there's access to that because banks has very limited options to deploy their money.

26:29And that's hence, that's why we were able to convince banks that we can play as partners early on in the process. Very early in the process, we were able to convince them that we are going to be your wholesaler. We're going to be your retailer. We're going to, we're going to bridge the gap between you and the end user. So it started with getting funding from the banks and on lending this to our customers a couple of, a couple of steps later. I don't know if I want to say years, month or what, but a couple of steps later, they came to us and said, okay, why don't you issue secretized bonds? And it's really a very good idea because secretized bonds is the main fuel for this business.

27:05And in Egypt, we have a very deep secretization market. Very deep, very good, has been there for 25, 26 years. People understand it. So they started actually issuing us secretized bonds. So we got, again, we will be able to access funding at a very cheap cost, which enabled us to take a lot of risks because we can understand now, we can try those customers, those set of customers, or if they're not good, we try another set of customers. And finally, last year, we started looking at banks and telling them, why don't we help you bring the customer and underwrite the customer and we can buy this asset without the need of having a secretized bond?

27:44Why don't you take it like directly? yeah so what we do that we went to some of the banks and of course only banks banks adoption is very difficult so we went to about three four banks i remember we were pitching a very simple thing very very simple thing guys we know how to underwrite people for credit cards because what we have is very similar to a credit card so we know how to write people for credit card you're actually issuing cards for people because they have value and and and and you're asking them to shut down their value account to the dbr becomes bigger and you give them a credit card Why this hassle?