A brief history of lending
The earliest evidence of lending dates back a solid 4,000 years ago to ancient Mesopotamia where grains and cows were used as the form of repayment, so it’s safe to say that we’ve come a long way since then – a very long way indeed!
The Greeks introduced payday loans but it wasn’t until the industrial revolution that international finance was really born. The history of lending has seen many changes but fast forward to the last 50 years, and we’ve seen the birth of online lending and even more recently, alternative online lending which has totally eliminated the need for towering paperwork and lengthy waiting times. Nowadays, getting financing for your business has never been easier, you could apply from your sofa and have your funds the very same day.
The question on everyone’s mind is: where is the future of lending taking us and how will artificial intelligence in finance take us to new heights? Buckle up.
How will AI disrupt the lending industry?
A new technological era is upon us revolutionizing the lending market space, but before your skeptical mind jumps to conclusions, let’s delve a little deeper to understand the real problem in lending and how or if AI can solve it.
1. Bad loans:
Banks and financial institutions often struggle with ‘bad loans’, something we can currently see in India as 2018 saw bad loans rise to 15% of gross advances! And something that we also saw back in the US in 2008 where the financial crisis saw more than 8,000 US banks registered a 149% increase in troubled assets.
2. More data, same old system
The second problem is that there are more data and more credit, but the same old underwriting techniques are being used. The amount of data that lenders and banks can find out about potential borrowers has risen through the roof. This drastically increased the ability for lenders to estimate credit-worthiness of borrowers, however, credit score isn’t EVERYTHING.
Credit score doesn’t take into account some of the rich data available in new-age platforms such as those offered at Become that can help to improve the ability to predict loan defaults.
AI finance technology has been uniquely designed to tackle the problems facing the lending market and is disrupting the loan-underwriting process and hence the lending industry as we know it. AI finance technology has the ability to capture complex patterns in customer’s data analyzing many aspects including personal and business financials, revenue, credit score and more to find borrowers that are more likely to default. This also opens more opportunity for others; for example, with AI, one borrower deemed risky on credit score alone, may not be so risky once all factors are combined – this is something our own technology does at Become.
Artificial intelligence in financial services also opens the door for the ability to utilize patterns that may be unique to the loan portfolios of different lenders. At Become, we work with over 35 lending partners, each offering unique loan products, services and with different factors that will change which business borrowers they will and won’t take on.
Different lenders have unique:
- Client acquisition channels
- Loan underwriting models
- Collection processes
- Factors regarding who is and who isn’t able to get a loan
Artificial intelligence in financial markets can not only analyze these variables and patterns but when it comes to Become (we can’t speak for others), our AI will generate different profiles for each lender and product to account for the differences and match them with a suitable borrower – whose credentials are all run through the system to match them up with the best product for their profile. It’s basically matching based on the risk associated with unique potential borrowers in order to provide a tailored funding solution.
Benefits of AI in lending
Change can be scary, but it can also be highly beneficial. Technology advances in the lending sector have been brilliant for both lenders and borrowers and the technology revolution is set to benefit both parties for years to come…
Main benefits of artificial intelligence in financial services include:
Taking the weight off of credit score – old school methods see lenders making yes and no loan decisions based entirely on a loan applicant’s credit score, it was purely black and white. AI in finance is blurring the lines and creating more opportunity for borrowers to qualify. Digital lending, through the use of technology, believes that this doesn’t paint a full picture of a loan applicant’s creditworthiness. This is where Become uses AI and machine learning to tailor the funding process and use a variety of factors.
Speed – research by the National Bureau of Economic Research has shown that fintech lenders on average, can process mortgage applications around 20% faster than their traditional underwriting counterparts. Where a traditional bank loan can take months to receive a loan, using AI and applying online, could see getting your hands on a loan on the very same day.
Ease – an improved convenient application process for mortgages, personal and business loans. AI simplifies the application process. Improved application experience is down to mobile apps, online applications and even e-verification options that not only drastically increase ease (and speed) of application.
Increased efficiency – the old underwriting process can effectively be thrown out the window. Paperwork has become a think of the past, something that not only lenders and borrowers will be grateful for, but also the planet (less dead trees!). One no longer has to fill out numerous forms and go back and forward from the bank, instead, all forms have been shortened and can be easily filled out online. Methods that include linking your bank account drastically increase efficiency, borrowers no longer need to print and scan all of their bank statements as the AI technology can simply read statements online in this paperless process.
Problems with AI
Machines replacing managers – with human decision making becoming obsolete as AI is spreading across the financial market, one could argue that this will see many losing their jobs. This, however, may be a bit dramatic and we may find that humans are actually needed to direct and guide the algorithms to achieve their objective. Hopefully, the future will see the two together working in unison. It’s not all doom and gloom! AI may not necessarily be about replacing managers but rather helping them do their jobs better.
Corporate control – you’re not the one who’s built these AI platforms and with companies reluctant to explain the makings of their AI (a bit like Coca-cola guarding it’s precious recipe), there’s no way of really knowing what’s really going on. It’s corporations, lenders and developers that are in charge of this confidential software which could lead to monopolistic issues down the road.
Reliance on machines – by relying too heavily on AI platforms to make the majority of decisions for you, it could lead to over-reliance in a possibly flawed system and lead to variables being overlooked.
Predictions for the future of finance
You may see artificial intelligence in finance popping its head up more and more, but it’s not the number of times you see this buzzword that’s important, it’s how said financial companies and institutions use that AI to translate the technology into value for the customer.
Predictions estimate that by 2020, at least 5% of all economic transactions will be handled by autonomous software. And if you’re worried about AI making managers jobless, then fear not. AI itself has actually created far more jobs that were unheard of years ago. Digital marketers are now a thing and a recent study from CognitiveScale partner Cap Gemini found that 4 of every 5 organizations using AI have actually created more jobs.
The future of finance is promising and uses of artificial intelligence in banking go far beyond finance alone.
A McKinsey report refers to automation in the field of banking as a “transformative power” for the industry and expects that a second wave of automation and artificial intelligence will emerge in the next few years. The report estimates that machines will do 10 to 25% of the work across bank functions. This could see employees freeing up time to “focus on higher-value tasks and projects,” according to the report.
Get a piece of AI finance today!
Become is at the forefront of technology. The company has become the leading AI-powered marketplace for business loans in Australia and is also speedily climbing the ranks in the US.
The patented AI algorithms match eligible business owners with optimal lenders (there are over 35 partners) and here’s the catch that really makes the difference, the lenders are relevant. This ensures that all factors are taken into account (not credit score alone), thus helping you get the right match with a relevant lender. It’s totally online, and better yet, business owners will only be matched with lenders they can qualify for!
On top of that, Become’s technology can help businesses who can not currently qualify for loans and guide them to ensure that they will be able to as soon as humanly (and robotically) possible.
Disclaimer: The information contained in this article is provided for informational purposes only, should not be construed as legal advice on any subject matter and should not be relied upon as such. The author accepts no responsibility for any consequences whatsoever arising from the use of such information.