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.
Douglas Merrill, a former chief information officer at Google, is now chief executive of ZestFinance.
And in that bank, whether a customer uses proper capitalization and spends time reading terms and conditions of a loan may make him or her more creditworthy.
Yet the technology is so new that...
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♦ The 3 companies featured in this article, Earnest, Affirm and ZestFinance are employing high-tech and advanced customer data in order to decide whether potential borrowers are worthy of personal loans, alternatives to credit cards for online purchases and even payday loans. Often within a few minutes.
Although this technology is fascinating, it also shines a light on just how much of our data is in the hands of strangers and that can be unsettling. It also makes things a bit difficult for people who are accustomed to being able to manage their creditworthiness, now they may be rejected and never understand what they did wrong or what to do in the future in order to receive loans and financial services through these upstart platforms. Even enthusiasts acknowledge that concern. “A decision is made about you, and you have no idea why it was done,” Mr. Rajeev Date (a venture investor and former deputy director of the Consumer Financial Protection Bureau) said. “That is disquieting.”
♦ On the flip-side, because these startup banks use the tools of data science instead of the traditional math of credit scores, which relies primarily on a borrower's credit history, an under-served segment of potential of borrowers may rush toward the services. Nearly 70 million potential borrowers in the US have very little credit history or no credit score at all. Young adults fresh out of college make up a large portion of this group as well as recent immigrants who haven't had an opportunity to build credit and find it hard to get started because of the lack of credit history.
♦ It seems that the major banks as well as regulators are keeping an eye on the new financing alternatives and tracking their progress as well as watching for the pitfalls, yet, not getting heavily involved with the new upstarts. These upstarts hold such an extremely small share of the lending market that they are not burdened by regulators too heavily but it will be interesting to see if these new age bankers can survive and thrive, and if so, how long will it be before major financial institutions infiltrate?