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FINANCIAL-TECHNOLOGY FIRMS TAP AI TO REACH MORE BORROWERS
ACCESS TO MORE DIVERSE SETS OF DATA AND ALGORITHMS HELP FINTECH COMPANIES CREATE
ALTERNATIVE CREDIT SCORES FOR UNDERSERVED LOAN APPLICANTS
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CHICAGO-BASED OPPFI IS AMONG THE FINANCIAL-TECHNOLOGY COMPANIES USING AI TO
SERVE A WIDER RANGE OF BORROWERS.
Photo: Shafkat Anowar/Associated Press
By
Angus Loten
May 2, 2022 5:30 am ET
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With an uptick in consumer lending, financial-technology companies see a chance
to grow by filling gaps for underserved borrowers, online lenders and industry
analysts say.
Rather than relying on traditional credit scores, many fintech lenders are
feeding a wider range of data into platforms powered by artificial intelligence
to present a broader picture of applicants who might otherwise be turned away by
banks.
OppFi Inc., a 10-year-old fintech platform based in Chicago, targets U.S.
households with an average of $50,000 in annual income that need extra cash for
car repairs, medical bills, student loans and other expenses. Todd Schwartz, the
company’s chief executive, said its customers are employed and have bank
accounts but are otherwise “locked out of mainstream financial services.”
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OppFi, which made its public-market debut last summer, uses an AI model,
real-time data analytics and a proprietary scoring algorithm to automate the
underwriting process. It generates a credit score by analyzing a loan
applicant’s online shopping habits, income and employment information, among
other data sources. The actual loans are handled by licensed banks and financial
institutions.
The company recently reported a record $187 million in loan originations over
the last three months of 2021, up 25% from the same period a year earlier. That
momentum has carried into 2022, Mr. Schwartz said.
Jerry Silva, a research vice president at International Data Corp.’s financial
insights unit, said fintech lenders—by their very nature—leverage digital
capabilities that traditional lending institutions “are still moving to.” He
said smaller online lenders are benefiting from a head start in the use of AI
and machine-learning models, digital document management and customer services
designed around mobile devices—though many banks are catching up, he added.
The global fintech lending market is expected to grow at a compound annual rate
of 27.4% over the next eight years, reaching $4.9 trillion by 2030, according to
research firm Allied Market Research. Many banks reported lending gains in the
first quarter, after two years of tepid loan demand during the pandemic.
A joint study by Harvard Business School and Vincent Yao from Georgia State
University, published in 2018, and updated last month, found that fintech
borrowers are more likely to default than borrowers from traditional financial
institutions—a risk fintechs offset in part by far lower overhead.
In a March conference call, Mr. Schwartz said OppFi tends to charge borrowers a
higher cost of capital until they build a track record of paying off their
loans. “If people are too high risk or they’re not using our system effectively,
it’s not the right customer-company fit,” he said then.
Since most fintech lenders don’t take deposits, they’re not subject to many bank
regulations that can bog down the lending process. Nearly every big fintech
company has to rely on bank partners for regulated tasks such as holding
customers’ deposits and issuing debit cards.
KARL JACOB, CEO OF LOANSNAP
Photo: LoanSnap Inc.
LoanSnap Inc., a five-year-old startup based in San Francisco, uses AI to scan
financial information such as a prospective borrower’s student-loan interest or
credit-card debt. It then packages the data into a mortgage-payment plan, based
on the lending requirements of its banking partners, that is designed to help
clients better manage their finances—a process that takes only a few seconds
from start to finish, LoanSnap CEO Karl Jacob said. “An example of this would be
paying off high interest credit cards with a lower interest rate home loan,” Mr.
Jacob said.
LoanSnap’s goal is to close home loans within 15 days, compared with an industry
average of more than 40 days. Its record is 24 hours, Mr. Jacob said.
“Anyone who’s ever gotten a home loan would agree that the process is still
slow, manual, labor-intensive and fragmented,” he said. Mr. Jacob said rising
interest rates are also bringing in more customers looking for both affordable
mortgages and better financial planning.
David Green, chief executive of online student-loan platform Earnest LLC, said
one of its advantages over traditional banks is customer service, which is “one
of the biggest gaps we fill,” he said. Earnest uses AI-enabled software to match
loan rates and terms based on how much a borrower can afford in monthly
payments. “We service loans entirely in-house and our customers always deal with
us directly,” he said.
“We’ve seen tremendous growth over the past two years, but more notable over the
last few months,” said Chris Doyle, president and CEO of Austin, Texas-based
lending platform Billd LLC.
Billd offers specialty financing for construction contractors, a market segment
that often is seen as risky by banks and other traditional lenders, especially
during turbulent economic times, Mr. Doyle said.
More recently, he said, higher interest rates and ongoing supply-chain
constraints are prompting many contractors to apply for lines of credit as a way
to mitigate risks in advance. By leveraging AI and a richer pool of data, he
said, Billd is able to turn around lending decisions in less than 24 hours.
“Banks are very slow, and we are fast,” Mr. Doyle said.
MORE FROM CIO JOURNAL
* Boston’s New CIO to Focus on Unlocking City Data April 28, 2022
* The CIO Brief Gets Bigger—This Time to Focus on Customers April 27, 2022
* Pentagon Taps Lyft’s Machine-Learning Chief April 26, 2022
Write to Angus Loten at angus.loten@wsj.com
Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved.
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