PoC Essentials: What Lenders Need to Know

Proof of concept (PoC) is an essential stage of cooperation between financial organizations and suppliers of alternative data for credit scoring. To ensure its effectiveness and relevance, lenders need to consider several key issues.

In this article, I will talk about what PoC is and the main points that fintech providers should pay attention to.

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What is Proof of Concept in software development?

PoC (Proof of Concept) is product testing aimed at proving an idea's feasibility and demonstrating its potential usage.

This method allows lenders to determine how integrating alternative data could enhance their credit scoring models and benefit their businesses.

This testing allows lenders to make informed decisions about incorporating non-traditional data into existing digital credit scoring models.

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Questions to ask the vendor before starting a PoC

When negotiating a PoC, the lender and the alternative data provider should discuss all issues affecting the quality of further cooperation.

In this article, I've compiled the main questions and reviewed why it's essential to get answers to them.

#1. Data relevance and quality

What types of alternative data will be provided?

It is critical for the lender to make sure that the data provided by the vendor does not duplicate data that is already used in the company's scoring model.

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How relevant is this data to our credit scoring processes?

Alternative data should help in assessing the creditworthiness and repayment ability of potential borrowers. If this information cannot be extracted from them, they will be useless to the scoring model.

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What is the source of the data, and how is it collected?

It is important that the vendor goes to a reliable source of data. This ensures high-quality data that is unambiguously interpretable and avoids errors.

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How often is the data updated? 

Keeping information up to date is very significant for financial organizations. If the data provided is weeks, months, or even years old, it is likely to be useless or even harmful.

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#2. Data integration and interoperability

How will alternative data be integrated into our existing systems? 

If your company's goal is a fully automated decision-making process, data integration should be done through APIs. Manual checks should be eliminated. 

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How does the supplier's decision-making speed compare to my company's speed?

One of the advantages of modern credit organizations is fast decision-making on loan applications. Therefore, they seek to receive data quickly – in a matter of seconds. 

Be sure to check with your vendor how fast this process is for them, as some may require several hours or even days.

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What kind of technical support will be provided with the integration? 

The best product will be useless if it's not integrated properly and users don't learn how to use it effectively. Make sure the vendor provides quality customer support for competent onboarding.

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#3. Data security and compliance

How is the data protected? Is the data compliant with relevant regulations (e.g., GDPR, CCPA)? 

Alternative data vendors are not responsible to borrowers for data compliance – it's the responsibility of the lending institution. Therefore, check that the vendor is using and storing data securely and complying with all existing regulations.

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#4. Metrics and Proof of Concept evaluation

What specific metrics will be used to measure the success of the PoC? 

Before discussing how to evaluate a proof of concept, it is important to define the goals of enriching the scoring model with alternative data.

For example, this could be an improvement in the approval rate, a decrease in the default rate, or fraud prevention. 

Depending on the goal, the metrics should be determined.

It is also significant to provide representative data to the vendor – only with this data, you can understand whether the solution works for your company or not.

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Will our lending model improve?

One of the essential metrics to monitor when evaluating alternative data vendors is the predictive power of the scoring model. Its improvement is a requirement for effective cooperation with the data provider.

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#5. Cost and ROI

What are the costs associated with PoC and eventual full implementation? 

PoC is primarily related to administrative costs, as it involves various resources. It is necessary to prepare data, conduct a legal review of all contracts and NDAs, and do further analysis of the data obtained.

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What are the development costs?

If the proof of concept is successful and a decision to cooperate is made, you need to assess how difficult it will be to integrate this vendor. Additional costs will depend on this.

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What is the projected return on investment (ROI) of the PoC? 

It is not possible to determine the ROI before the PoC. It can only be done after the PoC is completed and the results analyzed. 

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#6. Scalability and future use

If the PoC is successful, how easily can the solution be scaled? 

In addition to the quality of the data provided, it's important to ask about the vendor's performance. 

Find out how many transactions it can process per day, week, or month. This figure should meet your need for audit volume.

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Does the supplier have clients the same size as my company?

Find out if the data provider's portfolio includes successful cases of cooperation with companies similar to yours. An affirmative answer allows you to see if they can handle your request.

It will also allow you to see if you can scale with the vendor if your organization is not yet that large.

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#7. Case studies and references

Does the vendor have clients in the region where the credit institution operates? 

Each jurisdiction has its own specifics. Understanding them is critical for the financial sector. 

If the data vendor operates in your region, it means they understand the local market and will be able to provide high-quality services.

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What were the results of their previous PoCs or implementations? 

Actual performance results are the best indicator of an alternative data provider's effectiveness. 

Ask for client references and successful projects, find out what results and metrics they achieved, and how they improved their credit models.

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The four important aspects of Proof of Concept trial

For PoC and further integration of alternative data into your scoring model to be successful, you need to pay attention to the following points.

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1. Define clear PoC goals

The main objective of PoC is to understand whether the product can solve your problem more effectively than other products on the market. 

To do this, you as a lender need to:

1. Define your objectives. Such as increasing approval rates or decreasing default rates.

2. Let the vendor know what your goals are internally. The provider needs to understand what you want to accomplish with alternative data integration. If the vendor clearly understands your business, they will know what to emphasize during the PoC. This will increase the effectiveness of Proof of Concept tests.

In other words, define your PoC goals and objectives and have an open dialogue with the vendor. This will help them provide you with the required data.

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2. Establish timelines for success

To track progress and ensure timely delivery, establish a timeline with specific milestones.

This is especially important if you are choosing from multiple alternative data vendors. To make an objective decision, put the candidates in the same environment and evaluate how they do in the same time frame.

It is also often essential in terms of budgeting in lending organizations and development planning. 

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3. Ensure effective onboarding for data use

To successfully implement a new solution in your lending organization, provide employee training and quality customer support.

This is in the interest of both parties – the financial company and the alternative data provider. For the latter, proper use of the data determines the effectiveness of the product in a particular organization and the lender's satisfaction and, thus, future cooperation with the lender.

In order to ensure the correct use of data, the vendor should provide good onboarding, talk about the provided data and product features.

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4. Set a PoC agreement - see the checklist

This is a critical document that must be signed before starting a PoC with a lending organization. 

Here is the basic information it should contain:

1. Purposes of transferring information to the vendor. This is the basis of the document and should be given maximum attention.

2. The type of data being transferred. It is important to specify exactly what data is being transferred to the vendor and whether it is personal or sensitive.

3. Security issues. In this paragraph, it should be specified whether the vendor should return or delete the data received after processing. It is also necessary to specify the security and confidentiality requirements for data processing and storage.

4. Involvement of other data processors. Make sure that your cooperation with the vendor is compliant with regulations in your region.

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Experience RiskSeal's free PoC

RiskSeal offers its customers a free Proof of Concept, which lasts 2–3 days and allows credit organizations to experience first-hand the effectiveness of our solution.

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Data we return

During the software Proof of Concept, our clients receive complete consumer information as if it were an API call in production.

We analyze the digital footprint of your potential borrowers, which includes a list of registered services, paid subscriptions, financial behavior, digital credit score, and trust score.

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Technical support we provide

We offer 24/7 technical support by phone or email, as well as detailed documentation and full data integration support.

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The projected ROI 

By turning to RiskSeal, you can expect a 20-fold return on investment. 

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The outcomes of our previous PoCs

The results of previous PoCs of RiskSeal:

• An increase in approval rates by up to 30%
• 26% reduction in KYC costs
• Reduction in default rate by 25%

Want to know more? Read about RiskSeal in the About us section, and visit our Pricing page and find out all about the cost and available functionality of our solution.