Sundeep Yerapotina on Personal Finance, Fintech, and More

Recently, I had the opportunity to interview Mr. Sundeep Yerapotina, the Chief Risk Officer for Rewards Credit Cards at Citibank. He is a subject matter expert in the field of personal finance and credit risk management. His experience covers consumer finance portfolios spanning four continents: North America, South America, Europe and Asia. Over the years, Mr. Yerapotina has developed best-in-class credit strategies and risk management solutions for multinational banks and global financial institutions. He is passionate about constantly raising the standard for risk management to build a robust system for consumer finance and banking.

I spoke with him on a wide range of topics on personal finance to get his perspective.

Interviewer: Mr. Yerapotina, thank you for taking the time to talk to me.

Mr. Y: It is my pleasure and thank you for the opportunity.

Interviewer: Personal finance is such an important topic that touches the lives of millions of Americans. I would like to start with the basics first. What are your thoughts on the role that credit plays in our society?

Mr. Y: It is a profound question. If I may oversimplify, credit fuels growth. It allows institutions and individuals to grow at a pace faster than their own resources can allow.

For example, if a small business wants to scale its operations to support its aspirations to grow bigger and more quickly, it will require capital that its own resources may not be able to fund. That's where credit comes in to help them scale.

To put it in the context of individuals, credit allows us to acquire wealth and attain a comfortable lifestyle that our personal or family's resources may not allow. For example, student loans allow us to invest in our education, which will help us acquire the needed knowledge and skills, and subsequently build a career and wealth that we might not otherwise have.

To give another example, home loans allow us to invest and live in a house, helping us eventually acquire ownership of it. Without a home loan, our life experiences might be delayed by many years or even decades. It also helps individuals build wealth, as their investment, the house in this case, appreciates in value over time.

Interviewer: So, you are saying credit is good for society?

Mr. Y: Absolutely, but if used wisely. First, any form of credit should serve a meaningful purpose in life. Second, the value it creates, tangible or perceived, should outweigh its premium. Third, and most importantly, the borrower should have the potential to repay the credit back as per the terms agreed on with the lender.

If I may use the earlier examples, education allows us to gain knowledge and skills. The income generated from the job acquired through that academic qualification should allow us to be able to repay the student loan back. Purely in terms of utility, the education gained from taking the student loan should help us get a job with higher income than one without. The higher income from that job, in the long term, should be more than the premium paid for borrowing the loan. Otherwise, it will fail to serve one of the key purposes i.e., getting the tangible value in terms of return on the money spent. Then there is our intellectual curiosity that our desired education satisfies as well as the fulfillment from hopefully getting a job and a career of our liking.

Similarly, home loans should allow us to live in a bigger home or in a desired locality than what renting would allow, thus offering a better standard of living and giving us the opportunity to build memorable experiences over the years. That's the perceived value of owning a home. Our income streams should allow us to repay the home loan. Finally, in order to create tangible value and generate wealth for individuals or households, the value of the home in the long term should ideally be more than our savings had we not invested in it.

Interviewer: Thanks for so clearly articulating the tangible and intangible values that can be attained. I can personally relate to your examples of education and home loans. They exist for the purpose of helping individuals and households acquire wealth, if I can paraphrase you. How about credit cards or installment loans that primarily help us purchase goods?

Mr. Y: Their primary purpose, in my opinion, is to offer convenience and to support short term lifestyle needs. Credit cards, for example, offer a very convenient and universally accepted substitute for cash. In addition, in this digital age, credit cards offer security from fraud risk, given their no-fraud liability benefit to their customers. Not to mention the rewards benefits on most credit cards and a flexible, revolving line of credit for any urgent needs.

At the end of the day, we are not robots solely existing on the principles of utility and return on investment. We humans place a value, most often not measurable, on convenience, lifestyle and social status, which some of the credit products offer as part of their value proposition.

Interviewer: It is a good segue to my next question. Millions of Americans are highly in debt and struggle with their ability to repay it. We often blame it on our society's culture of credit. And in the twenty-first century, banks, which over the ages were perceived to champion customers' financial well-being, have been vilified for perpetrating it. What is your take on this?

Mr. Y: Thanks for this thoughtful question. There are two parts to it: one, the problem of indebtedness in the U.S., and second, who is accountable for it. Let me address them both.

You rightly point out that sections of our society are fraught with this challenge. In my humble opinion, the root of it lies in excess. I keep saying to everyone that credit should only be used to support a sustainable lifestyle.

In my observation, lack of credit can really limit individuals and households, and society more broadly, from building wealth and climbing the socio-economic ladder. It is really telling when you look at the situation in many developing and underdeveloped countries.

While access to credit is really important, inordinate access to it, coupled with its excessive marketing and a lack of proper financial literacy, has the potential to create a culture where unhealthy reliance on and use of credit could become commonplace. Easy access to credit can create a false sense of affordability, drawing us to acquire possessions or receive services without truly assessing our ability to repay it or evaluating whether the possession creates enough value to at least match, ideally outpay, the cost of its financing.

This perception of affordability can also result in inflation of the cost of the goods or services offered. Case in point, the tuition that is charged by many academic institutions for some degrees far outweighs the income that careers in those fields result in.

Now, talking about accountability, I view it as a collective responsibility to keep the system healthy. It falls on the consumers, the banks/financial institutions, and the companies/institutions providing the goods or services that are financed. I would also add financial regulators to this list.

Interviewer: Where does the solution lie in your opinion?

Mr. Y: It is a complex problem. The solution lies in creating an ecosystem which can strike the right balance. In an ideal model, all the players in the ecosystem should benefit. It requires earnest participation from the players involved, with regulation creating the cordon to ensure the sustenance of healthy practices that are critical to maintain the balance.

Let me lay it out further.

At the very foundation of it lies financial literacy. It puts control directly in the hands of the consumers. Creating awareness, I would, in fact, go further and say imparting knowledge about money and credit management is very important for the financial well-being of a society. I recommend introducing it as part of our academic curriculum from an early age. It will instill the financial discipline that will last one's lifetime, and once the virtuous cycle sets in, it will get passed on to future generations.

Next comes the role of banks and financial institutions. One of their mottos should be serving the interest of their clients. In fact, it should reflect in their operating principles and translate into how they conduct business on a day-to-day basis. Ethical leadership is the key to its adoption. The same applies to companies/institutions providing the goods or services that are financed, more specifically the academic institutions.

Finally, financial regulation is required for enforcement of the true spirit. When power is not evenly distributed among the players, those wielding greater power can influence the system to start gaining undue advantage at the expense of others. In a free market like the U.S., competition can limit such undue advantage. However, its effectiveness can vary significantly from one sector to another.

In the context of our conversation, banks/financial institutions, and even academic institutions, in the case of student loans, require checks. Regulation needs to ensure fair lending and other healthy practices that safeguard consumer interests and their financial well-being.

ECOA (Equal Credit Opportunity Act), TILA (Truth in Lending Act), CARD (Credit Card Accountability Responsibility and Disclosure) Act, FCRA (Fair Credit Reporting Act), FDCPA (Fair Debt Collection Practices Act) are a few such regulations. Legislation of the right regulations and their enforcement offers the cordon I referred to above, which can help in maintaining an equilibrium.

Interviewer: You are a Chief Risk Officer at Citibank. Does risk management play any role in responsible finance?

Mr. Y: It indeed does. As one can imagine, the function of risk management at a financial institution is to safeguard the company from all types of risks it faces, be it credit risk, interest rate risk, liquidity risk, compliance risk, technology risk, or the other risks a bank may be exposed to.

Speaking of consumer lending, credit risk is one of the most important risks to manage. Credit risk management is about managing the risk around repayment of loans a bank issues to its customers. At the heart of sound credit risk management lies responsible finance. Responsible finance means offering the financial product or service that a customer needs and can afford. By focusing on its customers' needs and their financial well-being, a bank can ensure its stability and financial success, too. It is especially critical for systemically important banks like Citi, JP Morgan Chase and Bank of America so as to ensure a robust financial system, which is one of the foundations for sustainable growth in an economy.

Interviewer: Since we are on the topic of risk management, let us talk a bit more about it. Given it is such a broad topic, let me be more specific in my question. What in your view are the key elements to successful credit risk management?

Mr. Y: As I mentioned earlier, principles of sound credit risk management are rooted in responsible finance. Broadly speaking, the objective is to find an equilibrium where the interests of the customer, the bank and the broader financial system can sustainably coexist. The following are the key elements:

1. Offering the financial products and services that a customer needs. Being invested in a customer's interest, among other things, drives reciprocity in terms of willingness to repay.
2. Offering financial products and services only to those customers who have the ability to repay. It prevents a customer from being overly indebted.
3. Pricing the financial products and services accounting for its costs, including the cost of credit, to ensure the right return to the bank.
4. Building risk tolerance in the returns to account for variability in customer behaviors and other market factors.

Interviewer: You are a subject matter expert in the field who has developed industry leading risk management solutions. What is needed to keep advancing the risk management practice?

Mr. Y: Staying true to the principles of risk management is the foundation on which all the advancements can be built. I emphasize it because anything glittering that is built on a shaky foundation will not last. We have room to make advancements in Infrastructure, Data, Tools and Decision Frameworks. It applies not just to risk management but more broadly to banking.

While we have made significant progress on these four aspects in the last few decades, in my humble opinion we still have room to improve. If we look at many of the major banks, parts of their infrastructure are still based on legacy systems. Significant advancement in technology has created the potential for banks to upgrade their systems.

On the other hand, evolution in the operating models with the shift to digital and the expectation on part of customers for faster fulfillment, coupled with significant volume and pace of data and transaction flow, has created the need for infrastructure upgrade. These shifts have also created new risks, such as fraud in the digital channels of interaction, which require new capabilities to mitigate them. There has been a lot of investment in infrastructure in recent years, and I see that continuing in the coming few years.

On data, I see opportunities on two fronts. One, storing a huge amount of data that is being generated through various channels and systems in a way that it can be easily accessed, linked and analyzed to gain meaningful information out of it. Two, creating and gathering new data dimensions that can help us to plug in the missing pieces. For example, collecting data on customers' income and wealth and using it in conjunction with their credit usage and other existing data attributes can improve a financial institution's ability to assess its customers' risk profiles.

More advanced tools to mine data using the latest computing systems have been quite useful and will continue to give financial institutions a better understanding of what is happening, why it is happening, and what is expected to happen in the future. Applying better decision frameworks, using these advanced tools, that evaluate customers as a whole and over a longer relationship period would in turn allow the banks to make better business decisions, create value for the customer and the bank, and achieve the desired financial outcomes. In the context of risk, it would mean better assessment and mitigation of risks.

Interviewer: Can you speak to the role of data and its application in financial services? Also, in today's times, how can we not talk about Machine Learning (ML) and Artificial Intelligence (AI) when discussing the application of data? What are your thoughts on the role ML and AI are playing and will play in this field?

Mr. Y: Generally speaking, data about anyone or anything (a person, an entity or a process) tells us about them without seeing or knowing them up close. It is the projection of who they are, how they behave or operate, and what they need and when.

For example, a picture of a person is data about their appearance. It is only a two-dimensional representation of someone at a point in time under certain conditions. We can more accurately know the appearance of a person if we have more pictures or videos of them in different social settings and over a period of time.

More relevant data offers the potential to lend better insight into a person, entity or process.

Data plays a very important role in financial services. Whether it is about anticipating what financial products or services a customer needs, understanding the risk a customer presents, detecting fraud, or identifying opportunities to better service customers, it has application everywhere.

Financial services has been ahead of many other industries in collecting and analyzing data to make smarter decisions. Personalization of products, services and experiences based on customers' needs, preferences, and risks allows financial institutions to gain a competitive advantage.

Data helps financial institutions to do it at scale. Ability to make better decisions using data, be it offering the right financial products and services to customers, addressing customer pain points proactively, more accurately pricing for demand, better assessing and mitigating risks, or preventing fraud offers a bank the needed advantage to attain better customer satisfaction and retention, more business, lower losses and higher profits.

In mature markets like the U.S., gaining competitive advantage is the primary way to gain market share and grow a business. That's why it is important to keep getting better at extracting insights from data and using them to make smarter business decisions. This is where advancements in computing capacity and data mining/learning techniques using ML and AI are playing a key role.

I would like to give a couple of examples. Application of machine learning algorithms to better evaluate risk on a loan application allows a bank to more accurately identify high risk and unprofitable customers, and as a result give access to the loan to more worthy customers.

Successful application of AI can allow automated systems like chatbots and interactive voice response to more effectively interact with customers and fulfill their needs, with reduced reliance on a human to get the answers. This, in turn, reduces wait times for customers and lowers costs for the bank.

Interviewer: Now, this is another question that I cannot afford not to ask you. We have seen a Fintech boom in the last few years, claiming innovation on the back of technology and data mining. What is your take on this trend, and how will it change the industry in the next decade or so?

Mr. Y: We are in interesting times. I would start by saying that we need to look beyond the fad to understand the differentiators and the value that is being offered by Fintechs. I believe that disruption, a positive one, of course, is good for any industry. So is competition.

Let me first talk about what Fintechs are claiming to distinctively offer. They claim to be offering value through a combination of the following: 1. new business models and financial products tailored to the current generation's specific needs, 2. modern systems and technology, 3. newer forms of data, 4. smarter mining of data to enable better decisions, and in the process serving some of the traditionally underserved customer segments, and 5. customer focused operating models that offer better experiences as well as better financial value to customers.

The most important thing to remember is that a viable financial service or product should address a customer need. I have not seen the emergence of a distinct, proven financial product in the market in recent times. To be frank, there is not a lot of room for it.

In the last few years, there has been a lot of buzz around 'Buy Now Pay Later' as a new disruptive offering. My take on it is that before we get too excited about it, we need to wait and let the business model play out and prove its viability. In fact, at this point, sustainability of this offering is not highly intuitive. It is too early to pass the verdict.

New entrants will generally have the advantage of building their businesses on the latest systems and technology. What they will not have is deep pockets to fund their business and the underlying systems. For traditional banks, at least the major ones, resources would not be a challenge but rather the will and the agility to change. Leveraging newer data, smarter mining of it with machine learning and artificial intelligence, and customer focused operating models are something that I do not see as offering an advantage just to Fintechs. Any player who embraces them and executes well will gain a competitive advantage. In my mind, the winner will be the one that has both the resources and the motivation to embrace and ideally lead positive change.

Security and trust are two very important factors for customers when it comes to money matters. I see the established banks having a clear advantage on security. On the latter, they have not earned themselves a great reputation in recent years, especially since the last financial crisis. Trust takes many years to build but a moment to lose. As for the newer players, they are yet to earn it.

Another aspect is the test of time. As one may have noted, most of the Fintechs have mushroomed in a time when the threshold for getting capital to start a business was quite low. Most of these Fintechs have not withstood the test of one full credit cycle with stress to customer behaviors and to credit losses on their portfolios. It is yet to be seen how many can and in fact will survive a moderately severe recession.

On the other hand, since the last recession, regulatory requirements have ensured that large banks maintain strong capital positions to be able to withstand economic volatility and stress to credit losses.

Speaking of regulation, it offers both an advantage and a challenge to Fintechs. Financial services is a highly regulated industry, and the cost of regulation is demanding after a financial institution achieves a certain scale. For a new entrant, it offers an advantage and the flexibility to grow faster when they are small. It will, however, restrict the pace of growth after reaching a certain scale.

Given the above considerations, Fintech will bring more competition to the industry and offer more convenient and competitive services by streamlining processes and lowering the profit margin, thus forcing the traditional players to evolve faster.

Most importantly, it will result in better services and value for customers. Few Fintechs will make their mark and achieve reasonable scale by gaining market share. Beyond that, there is more hype than real substance, in my view. I see the customer as the real winner, which is always good.

Interviewer: This leads me to ask you, what is your perspective on the future of personal finance and lending?

Mr. Y: Lending has existed in a variety of forms for a very long time, probably dating back to the start of the human civilization. It is poised to last the remaining lifespan of human beings on this planet. As I mentioned at the start of our conversation, it definitely has a constructive role to play in our society and in enriching life by generating wealth and supporting a better, yet sustainable, lifestyle. But like anything else, it should be offered and used in the right measure.

In terms of the future, if I strip away the fads that will come and go, the key lies in sticking to the fundamentals: meeting the customers where they are and offering them what they need and can afford. In the end, healthy personal finance will come down to offering the right products and services, making decisions that will keep the customers' interests in mind, and focusing on building long-lasting relationships. And when such a model is based on sound financial and risk management principles, it will result in sustainable business and growth.

Interviewer: I would like to conclude our interview on this note. Mr. Yerapotina, I would like to thank you for your time and for sharing your insightful perspectives on such an important subject that affects more than 250 million Americans.

Mr. Y: I really enjoyed our conversation. Thank you for having me.