Towards Value-Based Finance: medicalising finance for better consumer outcomes
A profound shift is happening in finance. For the first time, products are being evaluated for the outcomes they create for customers, and not just the profits they make. This marks a critical turning point for our financial system. It mirrors a shift that began a decade or so ago in an adjacent industry also heavily regulated, complex, and existential to us - healthcare.
This is a tectonic shift with the power to reinvent finance as we know, and it’s long overdue. We call this the medicalisation of finance. Our mission at Fuse is to make this transformation happen as fast as possible.
In this article I put forward this case for change by arguing three things. First, that as a financial system we are failing to build products that improve consumer financial health, and we must hold ourselves accountable to doing better. Second, by looking at the implementation of Value-Based Care (VBC), key lessons on how best to hold ourselves accountable can be learnt. Third, that new forms of technology will be required to power Value-Based Finance (VBF), with products like Fuse playing a key part.
A systemic gap
The success of a financial system can be measured by looking at overall growth in wealth (GDP), and how this wealth is distributed, measured by median real income.
Since the 1970s, these two metrics have ‘decoupled’ in the UK and most other developed countries. The growth in personal wealth has lagged behind growth in the economy. Decoupling began around the time of the 1979 oil crisis, and has continued since. You can find our summary of the last 100 years of economic history that led to this here.
It's never been clear to me why recoupling these indices isn’t more of a focal point for key actors in our financial system.
In the wake of the 2008 GFC we focused on capital solvency and preventing irresponsible sales of products like subprime mortgages and CDFs. Now in 2023, we are again fixated on preventing lenders from going bust. These focal points have never made sense to me. Lender solvency is necessary to maintain economic stability. But on it's own it won't reverse this decoupling, and improve consumer wealth. We must hold ourselves accountable to improving consumer outcomes. This is the key to building sustainable financial health in our system.
What healthcare can teach finance
Why are we not more focused on improving consumer financial outcomes? This is because financial providers aren't being held accountable to do so. As a former healthcare consultant, I'm reminded of the US healthcare system which had a similar dynamic.
At the end of the 20th century, healthcare in the US was a wild west. Care was expensive, often unattainable, and poorly quality controlled. This began to change when insurance firms (payors) and regulators pressured hospitals (providers) to deliver affordable, more effective healthcare to consumers.
What emerged was the enthralling concept of Value Based Care (VBC), or “a healthcare delivery model in which providers, including hospitals and physicians, are paid based on patient health outcomes”. Today, VBC is unlocking significant value by aligning incentives of patients, payors and providers. It has encouraged providers to offer cost effective treatments, often preventative in nature, that cost less to deliver and result in superior patient outcomes. It is estimated that VBC saves 5.6% of care delivery costs, improving EBITDA for care providers by 20~50%, while creating $1 trillion in new enterprise value.
I would bet that embedding parallel incentives in finance would unlock value of a similar magnitude. If lenders only lent to customers who they knew would grow wealthier by using their product, we would see lower defaults. If lenders only made money when customers improved their financial situation, we’d see investment in solutions that monitor financial health, and prevent late repayments of debt.
We estimate that VBF could save banks $150~250bn from loan loss reductions alone. But the value of VBF will be much higher. Unlike in healthcare, if your customer gets financially healthier, the profits you make from them tends to grow. This is especially true if you are monitoring their financial health, and aware of their evolving needs at each life stage.
But why isn't VBF widely adopted already? Banks are in better health compared to earlier this millennium, although this is being tested in 2023. Alternative datasets like Open Banking are being adopted to lend to marginalised populations. But I would argue these are babysteps. To enable systemic change like VBF, we require stronger incentives. Regulatory change is key to ensure this happens at pace.
This is why the Consumer Duty is exciting. This regulation will be in force by July 31st 2023 in the UK. It requires lenders to ensure good outcomes for customers and monitor their vulnerability. The Consumer Duty is a clear starting gun for VBF.
It continues to baffle me that today, we give people decades-long mortgages, and do little to track their changing circumstances. We blindly assume they will get good outcomes from a product they will spend the majority of their lifetime earnings on. I'm excited this could finally be about to change with the Consumer Duty and VBF.
Making VBF a Reality
In healthcare, one of the biggest challenges to adopting VBC has been the lack of outcomes measurement techniques and reliable data. This will be true for VBF too. How do we define and measure good outcomes in finance? And with what data?
Our approach at Fuse (which began with Pave), is to systematically launch products that build the technological foundations required for VBF. Our gap analysis of VBF compared to VBC is outlined in this table.
Healthcare is much older than finance, which might explain why the former is a few steps ahead. It began when we first observed symptoms of ill health, and decided to treat them. It evolved from rituals, magic, and plant-based natural remedies, towards scientific, bureaucratised care delivered by professionals in centralised hospitals.
As a general trend, healthcare has evolved ‘backwards’, starting with the treatment of higher acuity patients to diagnose and predict their prognoses, and now towards preventative forms of treatment, accelerated by VBC.
Our philosophy at Pave was to ‘innovate’ backwards too. Our credit building app helps people with bad credit history rebuild it. We’ve supported hundreds of thousands of consumers - with predominantly ill financial health - to build their credit scores with 99% efficacy. In the process we amassed hundreds of millions of data points on what causes bad (and good) financial health, across Open Banking/current account transaction data, credit file data and our own lending outcomes data.
We are using this data to train models that ingest any type of transaction data to detect and predict ill financial health, and made these available with Fuse. With our first set of partners we've already shown that Fuse is able to predict financial vulnerability with a +20pp accuracy compared to conventional methods.
Our usage of transaction data to create deep customer insights is especially exciting. Transaction data is real-time and an immutable source of truth, and has only recently been made available through Open Banking. It has the potential to fill a critical ‘missing middle’ of VBF infrastructure by providing real-time predictions of consumer financial health, and help providers monitor and ensure good outcomes.
But this is just the first step. Our vision is to completely reinvent how financial products work, by going beyond predicting outcomes, and going as far as recommending what actions and products providers should offer their customers to ensure the best outcomes for them.
The technologies offered by Fuse will unleash the next wave of innovation towards preventative forms of financial healthcare. We are building infrastructure to enable VBF at a critical time, with consumer savings levels and economic confidence both at a historic low. We’d love to hear from you if you are excited as we are about applying healthcare systems design to finance, to radically overhaul how things work for the consumer.