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Volume 3, Issue 1

PreViewProtiviti’s View on Emerging Risks

As organizations continue to evolve their risk governance practices, focused and relevant information about emerging risks is at a premium. The objective of Protiviti’s Preview newsletter is to provide an input for these efforts as companies focus on risks that are developing in the market.

In this special issue, we take a second look at topics we discussed previously, to help organizations understand how these issues have progressed and anticipate their potential ramifications. We revisit the ongoing troubles caused by municipal financial instability, the possibilities created by the unstoppable growth of Big Data, the opportunities that mobile banking offers to previously marginalized consumers, and the evolvement of, and key risks connected with, social media lending.

As we’ve explained in the past, our framework for evaluation of these risks is rooted in the global risk categories designed by the World Economic Forum. Throughout this series, we will continue to use these categories as a framework for classifying macro-level topics and the challenges they present.

We are interested in your feedback. Visit our blog, “The Protiviti View” (blog.protiviti.com), to continue the conversation. For more on emerging risks, visit our microsite, www.protiviti.com/emergingrisks. We welcome your input and comments.

Foreword

Emerging Risks

Environmental

GeopoliticalSocietal

Technological

Economic

Inside This Issue

• Municipal Instability: Another Look Back and a Look Forward Page 2• Big Data Revisited Page 5• Mobile Banking: The New Normal Page 7• Social Media Lending Page 10• Where to Learn More Page 12• The Protiviti View – Continuing the Conversation on Our Blog Page 14• About Protiviti Page 14

SPECIA

L

LOOK-B

ACK EDITION

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Municipal Instability: Another Look Back and a Look Forward

Key Industries Impacted: Consumer Products & Services, Energy & Utilities, Financial Services, Government, Healthcare & Life Sciences, Industrial Products, Technology, Media & Communications

What We Said

In PreView Volume 1, Issue 2, published in December 2014, we noted the rise of municipal financial instability by highlighting the growing municipal debt and the decline in the number of municipal investors due to increased municipal bond defaults (illustrated in the updated chart below). Our premise was that an increasing number of municipalities with speculative-grade ratings are having to borrow at higher costs to meet their obligations, leading to the possibility of risk-adverse investors pulling out of the market as loss probabilities rise. If municipalities lose a vital source of potential funds, reduced municipal spending can result in cuts to critical public services, leading to longer response times by police and fire, higher crime rates and insufficient infrastructure. Efforts by state and local governments to close the gaps by raising taxes to increase revenue are likely to drive individuals and businesses to relocate to areas with less burdensome tax environments, creating a downward spiral of revenue loss, unemployment, depressed commercial and residential real estate values, and increased bank loan losses.

Municipal Defaults Since 2008

2008 2009 2010 2011 2012 2013 2014 2016

Illinois and Chicago:Education cuts, budget shortfalls, pension obliga-tions at risk

Puerto Rico suspends transfers into a fund that pays general obligation bonds, defaulting for the first time – $58M

Hillview, KY files for bankruptcy – $50M

San Bernardino, CA files for bankruptcy – $1B

Jefferson County, AL files for bankruptcy – $4.1B

Puerto Rico "claws back" revenue to avoid general obligation default

Prior to 2008, the last major municipal bankruptcy was Orange County, CA in 1994

Detroit, MI files for bankruptcy – $18B

Vallejo, CA files for bankruptcy – $50M

Stockton, CA files for bankruptcy – $200M

2015

We also highlighted the growing debt crisis in Puerto Rico, where there have been significant new developments since our issue over a year ago, including new challenges that will determine Puerto Rico’s financial health moving forward. Below, we revisit the U.S. territory for an update on the current situation, then we examine some concerning financial trends in the state of Illinois and the city of Chicago, both of which can influence the way the crisis in Puerto Rico is resolved. In each case, the outcomes are certain to have significant effects on the way all states and territories operate financially in the United States going forward. Thus, the narrative continues.

ECONOMIC & SOCIETAL

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What Has Happened Since

Puerto Rico Updates: • Recent default: Puerto Rico temporarily suspended deposits into a fund that pays its general obligation bonds, and

in August 2015 one of its agencies defaulted for the first time. In order to avoid another default in December 2015, the commonwealth elected to “claw back” revenue from other debt to make a $350 million debt service payment on its general obligation bonds and fund essential public services.

• Insurmountable levels of debt: Despite efforts to curtail its liabilities under increased scrutiny from its creditors, Puerto Rico’s total debt has remained at approximately $72 billion as of January 2016, equal to approximately 100 percent of the commonwealth’s annual economic output.

• Business regulatory risk: Two global banks’ brokerage units, UBS and Santander, have been ordered to pay tens of millions of dollars in fines for investor losses related to Puerto Rican bond funds. Santander was fined for continuing to include Puerto Rican securities in client portfolios while selling off its own inventory of the funds. UBS was fined for marketing Puerto Rican bond funds as safe investments, when, in fact, most investors’ assets were concentrated in a small number of the Puerto Rican bond issues. Furthermore, both banks continued to allow clients to buy into the Puerto Rican bonds on margin, which is not permissible in a declining market such as Puerto Rico, per guidance from the Financial Industry Regulatory Authority (FINRA). UBS still faces 900 investor complaint cases filed with FINRA and upwards of $1.1 billion in damages related to its Puerto Rican activities.

• Restructure attempts: Efforts to restructure Puerto Rico’s debt have grown in complexity. The commonwealth has offered Government Development Bank for Puerto Rico (GDB) bondholders securities backed by petroleum-related taxes. However, a restructure of this nature would require U.S. Treasury facilitation, a time-consuming process that decreases the likelihood that bondholders will be paid on time.

• Supreme Court bankruptcy hearing: The White House has outlined legislation to restructure Puerto Rico’s debt. Initial legislation introduced allowed only for the restructuring of debt issued by municipal entities within Puerto Rico, but not the commonwealth itself. New legislation would create a new regime of restructuring by allowing the central government access to a court-administered restructuring process – something that has never happened before with a U.S. state or territory. Puerto Rico’s ability to restructure its debt by enacting its own bankruptcy law will now be determined by the Supreme Court, which announced its decision to review the case in December 2015.

• In order to maintain an incentive for U.S. states to manage their debt responsibly, without the possibility of a government bailout, the Obama administration has indicated that the new restructuring legislation should only be available to U.S. territories, such as Puerto Rico. However, speculation remains that, if passed, the law would allow a U.S. state with large fiscal issues to attempt to follow suit, leading to potentially substantial losses for bondholders. Recent developments in Illinois provide context for such a concern.

Future Considerations

Illinois: The Next Puerto Rico?Several key risk indicators – cuts in public services, pension funding shortfalls, credit rating downgrades and the threat of corporate relocation – pose a concern that Illinois may face a situation similar to Puerto Rico. Specific elements of the Illinois budgetary crisis are highlighted below:

• Public services vulnerability: Nearing its sixth month without an agreed-upon budget, the state of Illinois continues to operate without full spending authority. The state recently passed legislation to release $3.1 billion in cash that was previously on hold to plow roads, train firefighters and facilitate the operation of 911 centers.

• Growing pension concerns: The state continues to pay a steep interest rate for its fiscal bond issues, and its pension obligations are the most severely underfunded in the United States (the state had an unfunded pension liability of $111 billion as of December 2015). Illinois’ last bond sale was in May 2014, but it plans to return to the bond market in the upcoming fiscal year. Illinois issued bonds on two different occasions in the last five years to cover its pension obligations, and the upcoming bond issue will likely be used to service these obligations, including $560 million in delayed pension payments, which were due in November 2015.

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• Credit downgrade: Due to the pension funding issues, the budget impasse and the growing budget deficit, Fitch Ratings recently downgraded Illinois’ credit rating to the lowest investment grade, BBB. Puerto Rico was also rated BBB by Fitch prior to being downgraded to a non-investment CC grade in June 2015.

• Corporate relocation: In 2011, the Chicago Mercantile Exchange, Caterpillar, Navistar and Sears – long-standing Illinois-based companies – all publicly considered relocation from the state. To keep them in the state, then-Governor Pat Quinn acted to modify the state’s corporate income tax credit program to provide hundreds of millions in special tax breaks to the companies. However, the program modifications used to create these tax breaks were suspended by current Governor Bruce Rauner in November 2015, and companies will be held to higher standards to attain tax breaks going forward. As a result, companies may once again seek to relocate. Given the critical importance of large corporations for the fiscal health of the state, corporate relocation will also be a risk to watch going forward.

Spotlight: Chicago

Although budgetary issues are plaguing the entire state of Illinois, the city of Chicago is fighting its own unique challenges. We highlight some specific features of the Chicago crisis below:

• Tax increases: Chicago homeowners will see their property tax bills rise by 12 percent when recently passed legislation is fully phased in. This tax hike is projected to raise an additional $543 million over four years.

• Credit downgrades: Recently, Moody’s downgraded Chicago’s credit rating to junk level, and Standard & Poor’s (S&P) downgraded bonds sold by Chicago’s Metropolitan Pier as the city of Chicago failed to allocate sufficient tax dollars to the agency’s debt service fund.

• Cuts in education spending: Facing potential school closures and compensation cuts, the Chicago Teachers Union authorized a strike to offset further action by the city of Chicago to close budgetary gaps related to Chicago’s public schools.

• Major budgetary gaps: Upcoming challenges for Chicago include a sharp rise in expenses due to police and firefighter pension systems and a shortfall in funding for Chicago schools in the hundreds of millions of dollars. Although the real estate tax increase will provide some relief, delays in funding from the state itself will continue to affect the city’s ability to close its own budgetary gaps.

Financial institutional investors with municipal exposure face significant risk if Chicago and/or Illinois were to declare bankruptcy. In addition, the upcoming Supreme Court decision on Puerto Rico’s bankruptcy eligibility could have a domino effect, which means all portfolios with municipal exposure would require increased scrutiny. As illustrated by the slew of impending lawsuits and fines facing UBS and Santander for their involvement in Puerto Rican bonds, bondholders and brokers of municipal securities alike should continue to monitor the ongoing struggles of municipalities throughout the United States and make investment allocation decisions accordingly.

Risk Factors Threatening Fiscal Instability in Illinois and Chicago

Growing Pension

Concerns

IllinoisCredit

Downgrade

PublicServices

Vulnerability

CorporateRelocation

TaxIncreases

ChicagoCuts in

Education Spending

MajorBudgetary

Gaps

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Big Data Revisited

Key Industries Impacted: Consumer Products & Services, Energy & Utilities, Financial Services, Government, Healthcare & Life Sciences, Industrial Products, Technology, Media & Communications

What We Said

In PreView Volume 1, Issue 2 (December 2014), we noted the opportunities that arise with the Big Data explosion, including the effect of the Internet of Things (IoT). We also cautioned about the dangers of over-investment in data analytics tools without a clear quantification of benefits, and against using data to support biased views. We identified the main challenges, including the risk of collecting data without the adequate ability to protect it, the costs and risks of adopting business intelligence and advanced analytics solutions, and the need for analytical governance and improved understanding of data management.

What Has Happened Since

While these issues continue to be relevant, it is becoming increasingly necessary for organizations to adopt Big Data to keep business operations competitive. Today, Big Data can help organizations both in the short term – for example, by guiding the determination of product pricing, and in the long term, by assisting with the creation of future strategies. In addition, over the last couple of years, computing power has increased tremendously, and we are now seeing cloud infrastructure being built out to offer capabilities not available before. For instance, it is now possible to rent CPU cycles through the enhanced cloud infrastructure, and use this rented power to process large volumes of data. The ready availability of computing power, coupled with the amount of unstructured data generated by companies daily (up to 100 percent growth in unstructured data annually, in some industries), presents opportunities that companies cannot afford to ignore if they want to remain competitive. Seventy-nine percent of business leaders agree that companies that do not adopt Big Data will lose their competitive position and may face the possibility of extinction. On the bright side, our initial research pointed to a 55 percent overall return on investment in data analytics. Recent studies show that a 10 percent increase in data accessibility will result in more than $65 million in additional net income for a typical Fortune 1000 company.

Future Considerations

• The amount of available data in the world will reach 44 zettabytes by 2020, or 10 times the amount of data in 2013. This data explosion will result not only from the growing number of enterprises and people doing everything online, but from all the new “things” connected to the Internet (the IoT). In 2014, data scientists spent an estimated 50 to 80 percent of their working hours on cleaning and processing datasets. The need to analyze vast amounts of information may require companies to focus on data governance and redesign their data structure and organization.

• Companies need to prepare for this massive influx of data by ensuring they have the necessary personnel and hardware in place in advance. Few IT professionals today have the experience to manage Big Data platforms. It is estimated that by 2018, the United States will experience a shortage of 1.5 million managers able to make data-based decisions. Many businesses will turn to outsourced data specialists or automated data preparation.

• Successfully adopting Big Data analytics within a company’s everyday operations presents significant opportunities:

– Increased visibility into the business through better data and data management practices. This alone may be worth the cost of investment in data analytics tools and resources.

– Improved decision-making, leading to reduced risk and increased profits. For example, a company can gain insights into customer behavior through real-time customer data analysis and improve customer satisfaction through personalized product offerings and service delivery.

– Ease of communication, as companies shift to a new standard of corporate data networking, with organizations of all sizes trading, publishing and measuring datasets. A company that has transformed its data platforms will be able to participate in this mass data sharing.

TECHNOLOGICAL

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Spotlight: Cybersecurity

With the monetary and reputational cost of cybercrime becoming an ever-growing burden for companies, using Big Data to combat cybercrime is becoming an imperative strategy. A recent survey of IT professionals from different government departments, including the U.S. Food and Drug Administration and NASA, concluded that data analytics allow agencies to better understand their overall information infrastructure and security environment. Most companies already have the necessary assets in place to improve their security; however, many have not realized the opportunities of data analytics in protecting their business processes. Big Data tools can be leveraged to discover the identity of cybercriminals and identify potential points of entry into their systems. For instance, the U.S. Securities and Exchange Commission (SEC) is using network analytics and natural language processors to monitor financial market activity and catch illegal trading. Data analytics combined with security solutions can help businesses to identify patterns and trends that lead to the early detection of criminal activity and security breaches, reducing their disruptive impact on business by catching them sooner.

Average Annualized Cost of Cybercrime by Industry Sector (In Millions)

$3.34Hospitality

$3.89Education & Research

$5.53Communications

$5.65Transportation

$6.01Public Sector

$7.65Industrial

$7.93Services

$8.09Technology

Financial Services $13.50

Utilities & Energy $12.80

Retail $4.88

Consumer Products $4.90

Healthcare $2.35

Pharmaceutical $2.75

Agriculture $1.97

Automotive $2.28

Media $3.15

Defense $6.61

Source: 2015 Cost of Cyber Crime Study: Global, Ponemon Institute, 2015: https://ssl.www8.hp.com/ww/en/secure/pdf/4aa5-5207enw.pdf.

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Mobile Banking: The New Normal

Key Industries Impacted: Financial Services, Technology, Media & Communication, Retail

What We Said

In PreView Volume 1, Issue 1, published in January 2014, we highlighted the growing popularity of mobile banking, noting that institutions that offer traditional brick-and-mortar banking services must make key strategic decisions around the continued use of physical branches and their integration with other banking channels. In our following issue, released in December 2014, we spotlighted online wallet services (PayPal, Amazon Payments, Google Wallet and Apple Pay) and the way these recent players have created new avenues for consumers to execute cashless transactions.

What Has Happened Since

Since the release of the first two PreView editions, trends have continued to show that consumers are interested in an “omni-channel” experience, where they can choose among different banking options, depending on their needs. Some financial institutions are responding to this trend by introducing “digital branches” where tablet kiosks integrate personal interaction with the mobile experience. Other institutions are reducing the number of physical branches in order to extend more resources to mobile banking options.

While mobile banking has offered financial institutions a unique and exciting new way to reach customers, it continues to present a new space for nontraditional competitors such as PayPal, Amazon Payments and others to enter the market and threaten the relationship between the consumer and his or her bank. In October 2015, a national study by CCG Catalyst found that 45 percent of the survey participants use PayPal, rendering it the most popular mobile wallet, and that over 50 percent of U.S. consumers will likely use a mobile wallet if it’s offered by their bank. If banks are slow to adopt similar, or superior, technology as their nontraditional competitors, consumers, especially millennials (see chart below), could shift their loyalty to companies like PayPal that allow them to shop and pay without ever pulling out a credit or debit card.

Apps for phone

Merchandise

Media

Groceries

Travel

0% 10% 20% 30% 40% 60%50% 70%

61%68%

58%66%

48%63%

19%44%

29%43%

Percentage of millenial consumers purchasing each type of product or service

FemaleMale

Online Smartphone Purchasing by Millennials (ages 20-29)

Source: Bricks and Clicks – Consumer Preferences on Retail Banking and Payments, Protiviti, 2015: www.protiviti.com/en-US/Documents/Resource-Guides/2015-Consumer-Banking-Online-Payments-Survey-Protiviti.pdf.

TECHNOLOGICAL & GEOPOLITICAL

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Future Considerations

• To reach technologically dependent consumers, banks must create and fully expand apps and websites to allow consumers not only to manage their personal funds but also connect with merchants to pay for goods and services.

• Banks must continue to leverage the capabilities of smartphones to improve customer experiences. For example, Remote Payment Capture (RPC) allows consumers to take a picture of a check and post it to their account instantly. In 2014, over 50 percent of mobile banking customers used this feature, a 12 percent increase from 2013.

• Cybersecurity and regulatory compliance remain key risks for banks moving onto the mobile platform. According to the CCG Catalyst study cited earlier, 68 percent of customers are hesitant to adopt mobile banking into their daily routines because of identity theft concerns. Some companies are turning to biometrics, or fingerprint scanning, for password authentication on mobile devices. Institutions that do not offer innovative ways to protect consumers in cyberspace will have difficulty attracting new customers.

• The Federal Trade Commission, with the support of the Consumer Financial Protection Bureau, has outlined specific rules, in the Gramm-Leach-Bliley Act, around consumer privacy, security and fair billing. These rules provide a road map for banks on how to handle consumers’ personal and financial data obtained through transactions on mobile devices. Regulations, however, will continue to evolve as the term “mobile banking” grows to encompass new technologies and a greater variety of transactions.

• One trend in mobile applications points to the possibility for consumers to apply, be approved and sign for loans without any human interaction other than a videoconferencing call. The same idea can be applied across many other banking transactions. This will lead to an increased regulatory focus on consumer protection and anti-money laundering safeguards to ensure that the move away from face-to-face banking does not leave consumers or nations susceptible to criminal activity.

Spotlight: M-Pesa: A Global Startup Success Story

Lack of access to physical banks in the developing world has led to 2.5 billion potential customers being underserved by financial institutions, or “unbanked.” However, about 1 billion of that population has access to mobile phones. This creates a tremendous opportunity to include an entirely new population in the global financial market, specifically through mobile banking.

In 2007, Vodafone launched M-Pesa in Kenya, one of the first large-scale mobile banking systems in that region. Since its creation, M-Pesa has grown its customer base to 20 million accounts across 10 countries and has paved the way for a new generation of startups created to connect people with banking through mobile technology.

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Emerging Risk Spotlight: Enhanced Regulatory Scrutiny in the Mobile Banking Market

In the United States Globally

While one of the benefits of mobile banking is greater financial inclusion, especially in developing nations, risks include illicit activity, which can be facilitated through the mobile banking platform. Concerns of the U.S. government center around consumer protection and stronger anti-money laundering/countering the financing of terrorism (AML/CFT) regulatory actions.

In countries where mobile banking technology, such as M-Pesa, is available, AML/CFT regulations face a unique problem. Often, such mobile money providers are regulated as a telecommunications, rather than a financial, industry, meaning many financial regulations don’t apply. Furthermore, certain emerging areas of the world, such as Sri Lanka, have adopted “proportional regulation,” which matches regulatory scrutiny to the probable risk of individual transactions. Thus, smaller deposits require less scrutiny than larger deposits, resulting in more relaxed “know your customer” (KYC) identification requirements.

In 2015, the U.S. House Financial Services Committee created a task force to investigate matters relating to terrorism financing, specifically focusing on terrorists being able to “exploit the financial system without causing harm to it.” The task force is faced with balancing immediate risks posed by groups such as ISIS with emerging risks related to technology advancements and cyberterrorism, as well as systematic vulnerabilities of the financial system.

In 2011, Kenya released the National Payment Systems Act, which imposes the same regulatory requirements on mobile banking providers as those placed on formal banking institutions. M-Pesa, a private company, has encouraged a heightened risk culture, conducting AML/CFT awareness training for employees and deploying transaction monitoring software that enforces restrictions on the amount and number of transactions conducted.

In Ethiopia, the National Bank of Ethiopia (NBE) issued a regulation requiring mobile banking operators to conduct business through officially licensed financial institutions, which requires adherence to AML/CFT guidelines.

U.S. government agencies expect financial institutions to be able to detect illicit activities as they occur. Laws, such as the Anti-Terrorism Act, hold those institutions accountable for “material support” of terrorism when a transaction involving a terrorist organization or group takes place.

The Central Bank of Yemen has issued formal communication to financial institutions and exchange companies, highlighting the need for customer due diligence measures by electronic transaction early movers.

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Social Media Lending

Key Industries Impacted: Financial Services, Technology, Media & Communications

What We Said

In PreView Volume 1, Issue 1 (January 2014), we predicted that an individual’s reputation on social media platforms, rather than their traditional credit score, could become a growing basis for lending. In addition, we anticipated that social media lending would create unique and complex fair-lending compliance issues and increase reputation risk with consumers. Lastly, we stated that social media disclosures and behavior might provide lenders with a source for validating information and a predictive profile of creditworthiness in the underwriting process.

What Has Happened Since

In our original discussion of the issue, we touched on the possibility of social media lending emerging as an alternative form of lending, by highlighting startups such as Lenddo, Neo Finance and Affirm. Instead, social media lending has evolved into a subset of a larger trend of utilizing alternative data elements outside of traditional credit scores or bank accounts to develop borrower profiles in order to determine creditworthiness. Companies are exploring this trend as evidenced by the following:

• Starting in 2016, Fair Isaac Corporation (FICO) is offering a new product called FICO Score XD, which was developed in partnership with LexisNexis Risk Solutions and Equifax. FICO Score XD allows bankcard issuers the ability to extend credit to customers who traditionally could not be scored. FICO Score XD takes into account alternative data points, such as customers’ utility bills payment history, public records and other reliable public information to determine the customer’s creditworthiness.

• First Access utilizes a combination of demographic, geographic, financial and social data from mobile phones to evaluate the applicant’s credit risk prior to offering a micro-loan. For example, mobile phone usage patterns, and the customer’s daily routine which can be derived from these patterns, are used as data in determining credit risk. A person who charges a constant amount of mobile airtime is considered to be less of a risk than someone who purchases an initial large block of airtime or an individual who has a dormant mobile account.

Spotlight: Lenddo and Affirm

Update on Lenddo – As of January 2015, Lenddo no longer offers loans; instead, it assists businesses with risk management by offering a credit risk scoring platform that incorporates social media. This shift in Lenddo’s strategy is an indication of the evolving business model of social media lending companies, from direct lending, to providing value with social media-informed risk-scoring models. Lenddo has expanded its product offerings in India, and its patented credit scoring system has helped a Latin American lender cut loan defaults in half. The company has a footprint in several other emerging markets, such as Mexico, Colombia and the Philippines.

Affirm developments – This key player, which we highlighted previously, has also changed its strategy since then. Previously, Affirm focused on accelerating smartphone sales through short-term loans to customers. Currently, it offers individuals micro-loans utilizing a combination of traditional FICO scores and social media data points. Affirm has raised US$320 million in funding since its inception in 2013 with its concept of providing social media-based micro-loans. Affirm’s target niche is unbanked individuals to whom it offers “progressive underwriting” by relying on public information, such as the customer’s LinkedIn profile, and bank account usage, accessed with the customer’s permission, to assess risk. This credit decision approach is not in conflict with the current regulatory environment because the FICO score is still used as a baseline, with bank account usage and LinkedIn information used to grant approval exceptions if the customer does not meet the FICO benchmarks. If the additional information does not warrant an approval exception, then the customer would be denied based on his or her FICO score.

ECONOMIC & SOCIETAL

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Future Considerations

Our prediction regarding the regulatory environment presenting challenges for social media lending within the United States was accurate. The Fair Credit Reporting Act in the United States impedes the implementation of social media data to gauge a customer’s creditworthiness. Section 607(b) of the Act states that whenever a consumer reporting agency prepares a consumer report, it shall follow reasonable procedures to ensure maximum possible accuracy of the information concerning the individual to whom the report relates. The use of social media data by a credit agency would be highly subjective, and the agency would not be able to ensure maximum accuracy. In fact, credit rating agencies like FICO stated that they will not be utilizing social media networks at this time to determine an individual’s creditworthiness because social media data has not been undeniably proven to predict credit risk. It is reasonable to expect that the current regulatory environment within the United States will force social media lending companies not to rely solely on social media data points in order to offer loans, or these companies may decide to focus their operations outside of the United States. Of course, this commentary is not intended to suggest that lenders using traditional credit information won’t consult social media for additional data points when making lending decisions.

The target customers for social media lending remain young adults or entrepreneurs, outside of the United States and in developing nations, who lack comprehensive credit histories. Alternative credit evaluation platforms, similar to the FICO Score XD product, which does not focus on social media data, could be utilized to address the needs of unbanked adults (consumers who do not have access to traditional banking products due to lack of credit) within the United States. These unbanked adults represent the market segment that is of interest to social media lending companies, whereas traditional reporting agencies (for example, Chexsystems in the United States) may not consider them.

Opportunities for Social Media Lenders – Unbanked Adults Around the World

Source: Global Findex Database, World Bank Group, 2014: http://datatopics.worldbank.org/financialinclusion/.

We have only glimpsed at the potential of social media lending. It may take years for social media lending pioneers to substantiate their correlation of social media data with credit risk. Nevertheless, we believe that social media lending will continue to play a role as part of a larger emerging trend of alternative credit evaluation. The future for alternative credit evaluation is promising, and companies will continue to seek ways to offer lending solutions to unbanked consumers throughout the world. Given that social media lending has been around for only a short time, the verdict is still out regarding compliance issues and reputational risks that these companies will face. Meanwhile, alternative credit evaluation platforms that are more quantitative, such as utility bill payment data, will become more prominent in evaluating the creditworthiness of unbanked adults in the United States, while social media data is likely to continue to be used in credit risk determination in emerging markets.

Percentage of unbanked adults by country

00.00 – 12.50

36.80 – 61.00

12.50 – 36.80

80.00 – 99.60

61.00 – 80.00

No Data

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Where to Learn More

Municipal Instability

“Chicago City Council Passes Largest Tax Increase in City History,” by Mark Peters, The Wall Street Journal, Oct. 28, 2015: www.wsj.com/articles/chicago-city-council-passes-largest-tax-increase-in-city-history-1446057965.

“Santander to Pay $6.4 Million in Puerto Rico Bond Settlement,” by Mary Williams Walsh, The New York Times, Oct. 13, 2015: www.nytimes.com/2015/10/14/business/dealbook/santander-to-pay-6-4-million-in-puerto-rico-bond-settle-ment.html.

“Supreme Court to Review Puerto Rico Appeal,” by Jess Bravin, The Wall Street Journal, Dec. 4, 2015: www.wsj.com/articles/supreme-court-to-examine-puerto-rico-effort-to-restructure-some-debts-1449256927.

“Rauner Corporate Tax-Break Plan Tightens Rules, Draws Critics,” by David Mercer, Associated Press, Nov. 15, 2015: http://chicago.suntimes.com/news/7/71/1102804/rauner-corporate-tax-rate-complaints.

“Rauner Signs Bill to Free Up Gas Tax, Lottery Money,” by Monique Garcia, The Chicago Tribune, Dec. 7, 2015: www.chicagotribune.com/news/local/politics/ct-illinois-senate-lottery-gas-tax-met-1208-20151207-story.html.

Big Data

“20+ Mind-Blowing Facts About Big Data Everyone Must Read,” by Bernard Marr, LinkedIn. Dec. 3, 2015: www.linkedin.com/pulse/20-mind-blowing-facts-big-data-everyone-must-read-bernard-marr.

“Big Data to Fight Cyber Crime,” PromptCloud, June 10, 2015: www.promptcloud.com/blog/big-data-to-fight-cyber-crime/.

“Big Data: Your Ally in Cybersecurity,” Forbes, Oct. 7, 2015: www.forbes.com/sites/teradata/2015/10/07/big-data-your-ally-in-cybersecurity/.

“Roundup of Analytics, Big Data & Business Intelligence Forecasts and Market Estimates, 2015,” by Louis Columbus, Forbes, May 25, 2015: www.forbes.com/sites/louiscolumbus/2015/05/25/roundup-of-analytics-big-data-business-intelli-gence-forecasts-and-market-estimates-2015/#698c1b724869.

“We’re Sitting on a Big Data Time Bomb,” by Cameron Sim, VentureBeat, Oct. 24, 2015: http://venturebeat.com/2015/10/24/were-sitting-on-a-big-data-time-bomb/.

Mobile Banking

“Study: U.S. Consumers Likely to Use Bank-Offered Mobile Wallets,” by Mike Dautner, Payment Week, Nov. 2, 2015: http://paymentweek.com/2015-11-2-study-us-consumers-likely-to-use-bank-offered-mobile-wallets-8724/.

“The Battle Between Africa’s Mobile Phone Companies and Banks Is a Boon for Financial Inclusion,” by Omar Mo-hammed, Quartz Africa, July 27, 2015: http://qz.com/462044/the-battle-between-africas-mobile-phone-companies-and-banks-is-a-boon-for-financial-inclusion/.

“Four Pressing Issues in Combating Terrorism Financing,” by Alex Zerden, American Banker, Aug. 20, 2015: www.americanbanker.com/bankthink/four-pressing-issues-in-combatting-terrorism-financing-1076102-1.html.

“Mobile Money,” by Kevin P. Donovan, The International Encyclopedia of Digital Communication and Society, Nov. 4, 2014: http://onlinelibrary.wiley.com/doi/10.1002/9781118767771.wbiedcs023/full#wbiedcs023-bib-0004.

Tracking Progress: Anti-Money Laundering and Countering the Financing of Terrorism in East Africa and the Greater Horn of Africa, by Liat Shetret, Tracey Durner, Danielle Cotter and Patrick Tobin, Global Center on Cooperative Security, March 2015: www.globalcenter.org/publications/tracking-progress-anti-money-laundering-and-countering-the-financ-ing-of-terrorism-in-east-africa-and-the-greater-horn-of-africa/.

PROTIVITI • www.protiviti.com 13

Social Media Lending

“Your Social Media Posts May Soon Affect Your Credit Score,” by Bill Hardekopf, Forbes, Oct. 23, 2015: www.forbes.com/sites/moneybuilder/2015/10/23/your-social-media-posts-may-soon-affect-your-credit-score-2/.

“Credit Score Company Denies Monitoring Social Media,” by Steven Rosen, Kansas City Star, Nov. 9, 2015: www.detroitnews.com/story/business/personal-finance/2015/11/09/credit-score-company-denies-monitoring-social-me-dia/75484520/.

“Lot of Contacts in Your Mobile Phone May Get You Loans,” by Sangwon Yoon, Bloomberg.com, Nov. 15, 2015: www.bloomberg.com/news/articles/2015-11-15/lot-of-contacts-in-your-mobile-phone-you-may-qualify-for-a-loan.

“Multiplying Data-Mining Startups Will Bring the World’s Unbanked to Lenders, Wall Street,” by Sangwon Yoon, Bloomberg News, Nov. 21, 2015: www.santafenewmexican.com/news/multiplying-data-mining-startups-will-bring-the-world-s-unbanked/article_1f1200d4-f9d7-5a8e-8af5-98bcb869dba2.html.

“Lenddo Stops Lending, Now Helps Clients Determine Customer Trustworthiness,” by Judith Balea, Tech in Asia, Jan. 25, 2015: www.techinasia.com/lenddo-customer-trustworthiness.

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About Protiviti

Cory GundersonManaging Director +1.212.708.6313cory.gunderson@protiviti.com

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The Protiviti View — Continuing the Conversation on Our Blog

The risk areas summarized above will continue to evolve, and there is no question that new risks will emerge and affect organizations globally. We invite you to continue the discussion we’ve started in this newsletter on our blog, “The Protiviti View” (blog.protiviti.com). Our blog features commentary, insights and points of view from Protiviti leaders and subject-matter experts on key challenges and risks companies are facing today, along with new and emerging developments in the market. You also can find additional information on our microsite, www.protiviti.com/emergingrisks.