20 Jan Banking start-ups adopt new tools for lending
When bankers of the future decide whether to make a loan, they may look to see if potential customers use only capital letters when filling out forms, or at the amount of time they spend online reading terms and conditions — and not so much at credit history.
These signals about behavior — picked up by sophisticated software that can scan thousands of pieces of data about online and offline lives — are the focus of a handful of start-ups that are creating new models of lending.
No single signal is definitive, but each is a piece in a mosaic, a predictive picture, compiled by collecting an array of information from diverse sources, including household buying habits, bill-paying records and social network connections. It amounts to a digital-age spin on the most basic principle of banking: Know your customer.
“We’re building the consumer bank of the future,” said Louis Beryl, chief executive of Earnest, one of the new lenders.
Yet the technology is so new that the potential is unproved. Also, applying the modern techniques of data science to consumer lending raises questions, especially for regulators who enforce anti-discrimination laws.
None of the new start-ups are consumer banks in the full-service sense of taking deposits. Instead, they are focused on transforming the economics of underwriting and the experience of consumer borrowing — and hope to make more loans available at lower cost for millions of Americans.
Earnest uses the new tools to make personal loans. Affirm, another start-up, offers alternatives to credit cards for online purchases. And another, ZestFinance, has focused on the relative niche market of payday loans.