A Practitioner's Guide to Unsecured Lending Risk Management, with Frank Tian
A credit risk specialist with over two decades in credit risk spread across Canada and the US, Frank Tian now writes, teaches, and consults on a wide range of lending risk management topics - so in this episode, I pick his brain, delving into everything from content to creation to the regional bank crisis and how AI might actually be the productivity boost we need to navigate ageing populations in the developed world.
Your best bet for all things Frank Tian is https://www.franktian.net/ but as he mentioned on the show, you’ll find him on LinkedIn, too, at https://www.linkedin.com/in/frankgtian/
You can also buy all of Frank’s books and courses via the affiliate links below. Being affiliate links, the price is no higher but if you choose to buy something I will earn a small commission. That said, these are also available on Amazon and Udemy, if giant corporations are more your jam.
Courses:
Consumer Lending Risk Management Fundamentals (free) https://risk-school.thinkific.com/courses/consumer-lending-risk-management-fundamentals?ref=dfc750
Consumer Lending Risk Management Essentials https://risk-school.thinkific.com/courses/consumer-lending-risk-management-essentials?ref=dfc750
Books:
New Credit, New Finance (ebook) https://risk-school.thinkific.com/courses/new-credit-new-finance?ref=dfc750
Unsecured Lending Risk Management (ebook) https://risk-school.thinkific.com/courses/unsecured-lending-risk-management?ref=dfc750
You can learn more about myself, Brendan le Grange, on my LinkedIn page (feel free to connect), my action-adventure novels are on Amazon, some versions even for free, and my work with ConfirmU and our gamified psychometric scores is at https://confirmu.com/ and on episode 24 of this very show https://www.howtolendmoneytostrangers.show/episodes/episode-24
If you have any feedback, questions, or if you would like to participate in the show, please feel free to reach out to me via the contact page on this site.
Regards,
Brendan
The full written transcript, with timestamps, is below:
Frank Tian 0:00
In this consumer credit risk management space, there's just so many things happening, so I think there's a greater need than ever for people to understand what's going on. I was talking about this with one colleague not too long ago: 25 years ago, when we first had access to the internet, people were hungry for knowledge; these days, when there's been an explosion of information available, but people are still hungry for knowledge!
I think the need is always there. And also, I think every generation has the responsibility to transfer knowledge, right?
So the book is one format, but there are many other formats. I'm still on their journey to learn how to leverage the new formats.
Brendan Le Grange 0:46
Frank Tian is the author of Unsecured Lending Risk Management, a book whose content overlaps neatly with the show's remit. So, if ever there was a case of no further introduction required, this must be it.
Welcome to How to Lend Money to Strangers with Brendan le Grange.
Frank Tian, author of Unsecured Lending Risk Management, which I have right here on my bookshelf, welcome to the show.
Frank Tian 1:23
Hello. Thank you, Brendan, glad to be here.
Brendan Le Grange 1:25
This is going to be one of those episodes, I can see already, where the primary challenge is going to be deciding what parts of your extensive career and body of work we focus in on. But, before we make those difficult choices, could you maybe just spend a few minutes giving us the very high level description of your career in credit risk strategy and kind of what's brought you to where you are today?
Frank Tian 1:47
Sure, sure. I'm a credit risk specialist, having two decades experience in the field for retail lending products for various banks and non-bank institutions: covering bank cards, retail cards, personal loans, FinTech loans, overdrafts, and more. The first 14 years in Canada, the most recent 7years in the United States.
Yeah, my specialty is really to help businesses navigate through different phases in the economic environment through proper and credit risk strategies.
Brendan Le Grange 2:20
You mentioned there are different economic challenges. And a number of changes obviously, are happening around us at the moment, we've seen the industry evolve over the last 20 years. But again, we stand on the edge of some more dramatic changes. You've seen what's happened in the past, you've seen it from a number of different angles, within big organisations, smaller ones, different parts of the credit lifecycle, and that's probably given you a rather unique and definitely a very valuable view of some of the mechanics behind the scenes.
There's other people that have been in a similar position, other people who've worked as long in lending risk management as you have, but what sets you aside from all those others is that you decided to sit down and consolidate all these things that you've learned from all these different viewpoints into a book.
I'm quite interested in that process: what motivated you to write Unsecured Lending Risk Management? And for those of us that are in the field and would maybe like to give it a read, what sort of topics have you gathered into that publication?
Frank Tian 3:22
Yeah, so how the book idea got started is that, when you work in the industry for a while you begin to receive some questions from your colleagues, and often in time, those questions are the same questions coming up. So then I thought about this: why this is happening?
One thing for sure, is that the knowledge of credit risk management is not taught in school, so you learn through practices. But also over the years, the structure is a flatter, right. So there's one large bank, I worked for the adopted the blueprint from the top consulting company, right, making one manager managing six/ seven direct reports. I think some of the audience, they can probably relate, it's very demanding for the manager, you know, doing your day job, but also you manage the work of six/ seven people.
So what I have observed is development responsibilities, somehow get lost from the management responsibilities. In some places, the managers become more product manager instead of staff manager, then that raises the question, how do you develop yourself?
You're really on your own, so you need some opportunities materials for yourself.
Then, after the great financial crisis, big banks retreated from the below prime unbanked segments, the fintechs, they move in. So all in all, so inside the traditional banks outside, you create a lot of demands for talents and all those talents. They need to possess the business knowledge. And it's not only for ris, folks, right? It's also for product, marketing, or even legal compliance, auditing.
I began to receive so many questions That's that, okay, I should have put it in the Q&A, but at least we will be pretty long. So okay, maybe it's time to put it in the book or in a more structured way.
Brendan Le Grange 5:09
I can see that happening, because obviously, we also are going through, or have been through, a big spike up in the value in the usage of data. And when you're working with data, you can sort of put almost anything in a model, and just see what the model says, and you listen to it. But the flip side of that is that you can create a team of specialists who really understand what to feed the model, but haven't had sight of the business side of how these different bits fit together.
And as you said, there's not just about risk modelling, but understanding how those all connect together and influence ultimately the the losses because in the end, it's about growing the business. And there's many ways that we can do that better. I can see why the books valuable today. I can also see why as we become more and more specialised is going to be even more valuable in the future.
Frank Tian 5:56
Yeah, Brendan, you are definitely right, the book is really to provide that business context for diverse stakeholders.
In my book, there's no technical language, because I think those things they tend to evolve over time. When I started, everything was in SAS, right, now it's Python and machine learning, right? All those, those are all great. But the fundamental of the products, the piece of model, they don't change that much.
Brendan Le Grange 6:21
Yeah. And that's Unsecured Lending Risk Management: a Practitioner's Guide. I got it very easily on Amazon, it's not very hard to find, so people should definitely go and have a look at that.
But also, I see that you're delivering a highly rated, in fact, I think the top rated, course on the subject on Udemy. So clearly, giving back to the community is a core part of your personal philosophy.
Let's stick on this idea of lessons learned and lessons shared for a moment. We're currently staring down the barrel of some very tough economic times to come. But we've also just come through the COVID pandemic, which was an opportunity to test a number of things to stress test a number of things and to learn a number of lessons.
So now that we're out of that crisis, and before we enter the next one, what lessons did you take from our communal time in lockdown?
Frank Tian 7:09
Yeah, if I think beyond the the credit topic, we began to realise it's really important to have each other to carry each other through to preserve the human capital. I think that's the most important thing, the well being of physical health, you know, mental health and financial health. It's amazing that across the globe, people come together.
Over time, people might forget, but i do hope that we remember this reason we banded together and went through the toughest period.
One interesting thing is that, although many actions are well intentioned, there are some unintended consequences along the way, right? We made some calls, but not necessarily the right ones. So my lesson from this is, we really need to stay humble.
As much as we would like to think we are experts, specialists, there are many things we don't know, right? Things are interconnected right now. So you pull one string, you might trigger something else. We need to be critical about what we hear, about what we read, we need to be critical about our own beliefs.
Brendan Le Grange 8:15
I think that's a great takeaway. And as big shock as that pandemic was, we went into that, at least with a pretty solid economic footing. Now that we've come through the other side, when you look at the portfolio's that you're seeing in Canada in the USA: how strong is it? Where are its weaknesses? What are the things that you are seeing as notable?
Frank Tian 8:37
Yeah, the market definitely develops pretty fast with some unexpected events, but one main theme this year is the interest rate - because that drives or the pricing cost of many lending products.
And what influenced the interest rate is really, first, the inflation and then the unemployment rate. The good news is in the US and Canada, the inflation has peaked from the six months ago, they gradually come down - inflation in the USA right now is around 6%; inflation in Canada, just above 5%. For the unemployment rate, both countries have the numbers at historically low. So good fundamentals. The interest rate hike period is probably near the end, that's the signal from the latest Fed meeting. Actually, Canada already paused once in the March meeting as well.
But obviously, we will see some credit normalizations which means the other risk metrics will go up because we saw that the early stage roll rate began to trend up. But again, when you look at the trajectory, it just goes back to three years ago, right, before the pandemic, so I think fundamentally it's still sound.
Brendan Le Grange 9:48
Yeah, that's good to hear.
And, as you said, we saw a lot of interest rate rises, and that remains the core headline, but hopefully, the worst of that is behind us. Of course, interest rate rises and and inflation are both cumulative. So a 5% rise is now on top of a 10% rise from the year before, but hopefully, the worst is behind us.
Now, I'm perhaps belabouring, this pre COVID/ post COVID comparison as a script device today, but I'll do it once more. One of the defining products to come out of lockdown seems to be Buy Now Pay Later. But post pandemic, it's a sector that's had a swift reckoning with many of the headlines now saying it's all but dead.
What do you think? Is there still a role for buy now pay later to play? Or do you think this is a product that's gonna essentially wash itself out of the system?
Frank Tian 10:37
BNPL is becoming an important a part of the overall credit ecosystem, but what we really are seeing is a divergence of different players. On the one hand, you have the original no underwriting, no credit reporting BNPL that probably shouldn't have started that way in the first place, right? So you need to do the proper fundamental things. On the other hand, you have the more responsible BNPL players - my message to them, if you're doing the right thing, you should scream that right off the roof, right? You tell people the right thing you're doing to differentiate yourself.
So pure players, they begin to either retreat right from the secondary market, or they pivot into banks, right, to cross out some other products, leverage their strong tech to really match the merchandise with the consumers to continue to provide a value beyond the simple credit function, because the competition is just too fierce over there.
Then you have the traditional players, card issuers card networks, they work together to provide the similar functions at POS or even post authorization.
Brendan Le Grange 11:44
Yeah, and I think for me, you know, the core takeaways of consumers value transparency, rather than you know, what can be a really complicated model in the credit card world. And, two, it's that targeted ability: I want to put this one thing on to a payment plan, not necessarily my whole month's worth of credit card spend.
And those can be moved around into many different products, those concepts that obviously, interest free is a huge selling point in the BNPL space. But we see many other products that suggest consumers are willing to pay for that sort of convenience, so I don't think having to charge an interest rate is that big a deal. But of course, these models are built on free to the consume,r interest free if you pay all four months, those are now because of those interest rate pressures, you've already mentioned, really hard to justify - not impossible, you know, on this show, I've interviewed BNPLs from South Africa where low interest rates are already in the teens, so there is a way to make it work, but yeah, much harder now that rates are rising.
You know, we've seen these rising rates impact other players. And I guess most notably, we've seen pressure from the rising rates be one of the reasons that Silicon Valley Bank had its collapse. We've seen Signature Bank collapse, we've seen Credit Suisse fall, yeah, not all of them because of interest rates, but you know, a lot of banks now being seriously looked at, the value of the assets that they hold, particularly where they're holding bonds and things that are interest rate related, being called into question.
If you look at that region in North America, what are your thoughts on the sort of developing banking crisis and where we might end up?
Frank Tian 13:17
Yeah, there are just so many angles to look at this crisis from banking systems, regulations, risk management, deposit insurance - but I think this will give the smaller banks wake up call.
They need to think about long term, what's their business strategy is, if the industry is volatile in nature, and you'll quickly develop yourself to become a dominant force, you'll enjoy the success of the industry but at the same time you tie yourself to industry. So when the industry goes into a downturn, you are going down with that: crypto is one example for a Signature Bank, too new, too volatile.
Of course, there's always the management factor. If you manage well, you can reduce the risk, but you wouldn't eliminate that risk completely.
The other thing I like to comment is, what's the impact to the consumers? Some estimate that the impact is equivalent to at least 100 pips rate increase. So for consumers, you are not subject to another 100 pips increase anymore. You can really enjoy a pause of the interest rate rises. In Canada, there's a lot of variable rate mortgages, the same in the UK, so that means that will be actual savings of dollars for consumers, but because of the general credit condition will contract people on the market, they might not enjoy the credit they could enjoy before.
Brendan Le Grange 14:46
Yeah, and I think you raised an interesting point there because often the gap between what's happening on Wall Street and what's happening on the High Street is mentioned in terms of wealth creation that Wall Street can be booming for years and the man on the street isn't actually doing any better, whereas here that gap has actually been a bit of a buffer. So Wall Street can lose a few bips. And most people that doesn't make any real difference.
Yeah, these things you do, sometimes you want a bit of pressure to get out the system. And as long as there's not contagion and continued collapse, so hopefully, yes, we've not been through a good time post COVID, but if we can get through this, hopefully, more stable and better times to come.
And let's keep on that 'future looking' side of things and maybe move past the gloom a bit.
Frank, we spoke a little bit earlier about you using more AI in this space, we have just seen ChatGPT4 being released, OpenAI's deep learning system. And that, at times, seems to be an every single headline out there. What are your thoughts on the impact of these generative AI systems?
Frank Tian 15:51
Actually, in my book, this was written two and a half years ago, the number one future trend I mentioned is automation. The number two thing I mentioned is Explainable AI.
But when I talk about AI that was only narrowly focused on the modelling, also risk strategy, I didn't imagine that right now the tool is available for much bigger scope. I think this is great. I think this is a breakthrough technology, our labour productivity is stagnant, it doesn't grow very much, almost zero, we really need some tools to help us.
But the tool has its drawbacks, like accuracy, some security issue, but I believe we can all work on that over time. Once you develop a risk model, you need to also to write pretty lengthy model document, right? For your model writing team, I can imagine they can turn your model output into a decent document probably in no time.
Brendan Le Grange 16:46
I think that's a great one. Because anyone who's worked on the practical side of modelling knows the model documentation is the last thing to get done, it's after a long and difficult project, somebody's lost the enthusiasm, it's always something that falls down. And it's not glamorous, but that often is a part of their job is just trying to understand somebody else's code. Those little things are also big benefits, freeing up productivity, you don't need somebody with a Master's or PhD in statistics to be sitting there writing the documentation for their code. If the machine can do that, they can be doing things that actually use their real skills.
So yeah, so some of these benefits of AI are not always going to be the fun and glamorous ones in the headline, but some of these dull tasks to be done better.
Frank Tian 17:29
Yeah, I think this really will free the workforce from the repetitive work, the low value tasks, that means it will raise the capability of our workforce.
That's exactly what we need, because we have less percentage of working age population. So they started before the COVID, right, and will continue to be so.
So I think this AI tool, can really help us produce more, right, create a bigger pie for all of us. So that's good for the economy for the society.
Brendan Le Grange 18:01
Frank, I know you're very busy, so thank you so much for your time. Yeah, you're doing so many different things. I see you've just published a new boo, but what else are you working on?
Frank Tian 18:11
Yeah, these days, besides the day job, I do want to put more time to create more content, as we just talked about, right? There's just so many things happening in this consumer credit risk management space. So I think there's a greater need for people to understand what's going on.
I was talking about this with one colleague: 25 years ago, when we first access to the internet, people were hungry for knowledge, these days, when you think about there's an explosion of information available, but people are still hungry for knowledge.
I think the need is always there.
And also, I think every generation has a responsibility to transfer knowledge. So the book is a one format, but there are many other formats. Your podcast is a great format. Social media is another format. I'm still on a journey to learn how to leverage new formats, right.
My goal is to impact 1,000 people each year through the various forms.
Brendan Le Grange 19:13
And if people want to participate in that they want to share some of that knowledge. They want to see what you're up to. Where are some good places for them to find you.
Frank Tian 19:21
They can visit my website: www.franktian.net
Or you can find me on LinkedIn, just search for Frank Tian risk, you should be able to find me.
Brendan Le Grange 19:31
Perfect, I'll put those links in the show notes as well.
Finally, before I let you go though, you're talking about content creation there and obviously, that's a big part of the modern economy. If people are listening, maybe they're in the credit space, but maybe they're just in a different niche but they also want to share back some of the knowledge they've created. They want to build some content and get more engaged in their communities. What are some lessons learned some tips maybe for them that you've picked up along the way?
Frank Tian 19:57
My first advice is that everyone has something unique to contribute, no two leaves are the same. Everyone has their own unique thinking, unique take, and that could be valuable to others.
Last Christmas, my son's school had this holiday party, right? All the kids performed on stage. I was sitting beside another parent, she could sing along with every piece of music, not only English, but also in French. I have no idea about those songs, but she's really enjoying herself. Then towards the end, the music piece is 'the coffin dance'. Then the lady said, 'hmmm, I've never heard this music'. Well, I said, this is the only music I do know, the coffin dance.
So I explained, you know what it's about, and said she should look it up on the YouTube. One person cannot know everything, but you always know a little bit of something that other people could find useful.
You don't necessarily need to write a book, right? There are many different formats today for you to express yourself, right? Simple making posts, for one. 100 words, 200 words, or you can shoot a quick one minute Tik Tok video or YouTube short - just start something small.
When you create more content, you educate yourself. That's what I have learned. I think that the biggest benefit is for myself.
Brendan Le Grange 21:18
Yeah, I think that's a great message. Because, one, yes, everybody does have something unique to share and, two, it takes a long time but the value is often to yourself. And I feel a lot of that the same for the show that, you know, talking to different people in the industry in different segments of the industry helps me to think through what I'm doing and helps me to get my ideas into order.
Yeah, the next step onwards from that is worrying about an audience and growth on that front there. So thank you very much. I think that's a very positive message to end on. And Frank, yeah, it's been a pleasure. Thank you for your time. I've had a great chat.
Frank Tian 21:50
Yeah. Great to be on the show. Thanks for the invitation.
Brendan Le Grange 21:53
It's a pleasure.
And thank you all for listening. Please do look for and follow the show on your favourite podcast platform and share the updates widely on LinkedIn where lending nerds are found in our largest concentration. Plus, send me a connection request while you're there.
This show is is written and recorded by myself Brendan le Grange in Brighton England and edited by Fina Charleson of FC Productions. Show music is by Iam_Wake, and you can find show notes and written transcripts at www.HowtoLendMoneytoStrangers.show
And I'll see you again next Thursday.