Ever since the concept of alternative lending took hold in 2013, proponents have made substantive claims of what alternative data could achieve by bringing disadvantaged consumers into the lending economy. At the time, however, traditional models such as FICO and Vantage were the status quo. While recent versions of these scoring models now incorporate alternative […]
Ever since the concept of alternative lending took hold in 2013, proponents have made substantive claims of what alternative data could achieve by bringing disadvantaged consumers into the lending economy. At the time, however, traditional models such as FICO and Vantage were the status quo. While recent versions of these scoring models now incorporate alternative data and provide some insight into consumers without complete credit files, acquiring this data has remained a challenge both for lenders and the credit bureaus.
Today, an estimated 45 to 60 million consumers lack the credit history needed to generate reliable credit scores under the current system, and millions more don’t have access to affordable credit because of low scores, according to FinRegLab, a nonprofit research organization.
But now, alternative lending is on the cusp of widespread adoption by lenders. In fact, some lenders are already considering alternative data, such as records of consumer payments from telecoms and utilities, in their decision to extend credit. And there’s solid evidence that alternative lending works. Research from McKinsey found that new alternative data models reduced credit losses in lower-income segments by 20 to 50%, while doubling application approval rates.
According to Accenture, bringing underbanked adults and small businesses into the formal banking sector could generate approximately $380 billion in new revenue. Equifax estimates that more than 91 million consumers in the U.S. alone are thin-file or no-file. About 22 million of those consumers currently qualify only for subprime credit offers, but that can change, with new data sources to inform risk models and the growth of alternative lending options.
Perhaps the best news is that lenders are embracing alternative lending after learning that they can bring disadvantaged consumers into their customer bases without increasing the risk of loan defaults. Those include thin-file or no-file consumers, such as:
Seniors who are unscorable, particularly widowed or divorced adults. Many have relied on lines of credit in their partner’s names for most of their lives, leaving them with a lack of credit history and a sudden lack of credit access.
Immigrants, who can present a conundrum to lenders, as their credit data does not immigrate with them. Lenders are left to make assumptions about credit history, and often the safer decision has been to exclude or decline the individual.
Minority groups, who today are disproportionately underserved. According to a LexisNexis study, 41% of Hispanics and African Americans were unscorable using traditional methods, compared to only 24% of the general population.
Millennials tend to rely on credit less frequently and a significant portion prefers debit cards. This leads to thin credit files and “hidden” financial transactions that do not help boost credit scores.
Here is another proof point that alternative lending has arrived: Adding utility payment data into VantageScore’s credit scoreincreased approval ratesfor low-income adults, African-Americans, and Hispanics by more than 20% – without overextending credit.
Alternative data has become the Holy Grail for lenders because they can increase the size and improve the quality of their approvable populations. But, even with mountains of evidence of the viability of alternative lending, it may be that only the word of regulators has the power to move alternative lending from trend to a sustainable mainstream industry practice.
On Dec. 3, 2019, regulators backed the use of alternative data, such as borrowers’ cash flow, as an alternative to the traditional credit-evaluation system, which relies on applicants’ history of borrowing and repayments. Alternative data “may help firms evaluate the creditworthiness of consumers who currently may not obtain credit in the mainstream credit system,” the regulators said in a written statement. “To the extent, firms are using or contemplating using alternative data, the agencies encourage responsible use of such data.”
Now, with increasing adoption of alternative data by lenders, there comes word that “innovative” new options in lending will gain momentum. According to researchers, “It [alternative lending] has already gained momentum in developed countries. The growing significance of innovative lending practices is foreseen to put a positive impact on the growth of the global alternative lending market. Demand for peer-to-peer (P2P) marketplace lending and crowdfunding, in particular, is expected to increase in the near future. This could play a crucial role in the development of the global market.”
As always, the proof is in the numbers. In a recent report of more than 300 lenders by TransUnion, the agency said that “83% of adopters using alternative data to score credit applications report seeing tangible benefits.”
It’s been said that the best test of an innovation is to observe its acceptance and performance in the marketplace. By that measure, alternative lending has been thoroughly tested and is here to stay.
Any entrepreneur will tell you, starting a small business is not for the faint of heart. It takes vision, grit, determination, dedication, an overwhelming willingness to fight to the end, the will to overcome hurdles you never could have anticipated. But the result, for those with enough heart to see it through, can be massively […]
Any entrepreneur will tell you, starting a small business is not for the faint of heart. It takes vision, grit, determination, dedication, an overwhelming willingness to fight to the end, the will to overcome hurdles you never could have anticipated.
But the result, for those with enough heart to see it through, can be massively rewarding. It takes a certain, special type of work ethic to start something from scratch, to build something from the ground up. Many have ideas, but few can execute to fruition.
Perhaps that’s why so many veterans transition from the military to business owners. All of those characteristics mentioned above…those are just standard traits for the men and women who dutifully and proudly serve in the military. So it shouldn’t come as too much of a shock to hear that as many as 25 percent of transitioning service members aspire to become small business owners. In fact, there are more than 2.5 million U.S. businesses today that are majority-owned by veterans.
Yet veterans are at a serious disadvantage when it comes to seeing their business ideas come to light. The issue isn’t a lack of desire, skill, or intent…it’s something else. Where, exactly, is the system broken?
An Overall Decline of Entrepreneurship – Why?
It’s a topic well-discussed by Inc.com in recent years – the fact that entrepreneurship as a whole has been on the decline for decades. Some reports show the trend has been on a downward slide for nearly four decades.
Just why is the ability to fulfill that age-old American dream of starting your own business in a slump? The main answer is simple: lack of access to capital.
For millions of businesses across the nation (both veteran-owned and non), cash flow and capital are a huge struggle. The simple fact is that access to working capital is among the greatest of challenges small businesses face. All too often, business owners just can’t get funding to start or grow their businesses. The term “underbanked” represents the 77 percent of small/medium business owners who are declined by traditional banks after they apply for funding for their business ventures. And for veterans, this is even more the norm.
VOBs – Entrepreneur Assets to Our Economy
U.S. veteran owned businesses (VOBs) are an essential component of our overall economy. The leadership skill sets and values service men and women hone during their time in the military is a big part of what transforms many of them into natural leaders. They develop an uncanny ability to solve problems…many of them are able to overcome the types of challenges most small businesses face during the startup phase. And these leadership skills often carry them throughout their tenure as business owners, even years after they launch. After analyzing four year’s worth of credit data (of both VOBs and non-veteran-owned-businesses), a recent report from Experian notes that VOBs tend to have improved sustainability and longevity when compared to non-veteran-owned businesses.
There are countless other substantial benefits VOBs offer. They’re more likely to provide employees with retirement plans, health insurance, paid leave and profit sharing. They’re also 30 percent more likely than non-veteran-owned businesses to employ fellow veterans. Statistically, research consistently shows that VOBs report impressive numbers in relation to growth, employment opportunities and sales, including:
VOBs with more than two employees = over 490,000
Total number of VOB employees = 5.8 million
Annual payroll = $210 billion
Number of VOBs that are “small businesses” = 99.9 percent
6-digit sales of $100,000 or more = nearly 80 percent
Generate an annual revenue of $500,000 or more = more than 38 percent
VOBs have collective sales of = $1.2+ trillion
What does all this tell us? VOBs are a huge benefit to the economy. That’s in part what makes it so hard to ignore the other side of the story. Despite their success and contribution to our economic sustainability, many VOBs – just like most small businesses today – are struggling to make ends meet. The Small Business Association (SBA) Office of Advocacy says that over 69,000 VOBs closed as a result of inadequate cash flow.
Taking that leap of faith and starting your own business has always been a risk, for any entrepreneur, but with entrepreneurship across the board on an overall decline (for both VOBs and non-veteran owned businesses), that risk seems somehow even greater these days.
Challenges Veteran Business Owners Face
Of the many challenges entrepreneurs face when starting a new business, for most, funding is high on the list. For the majority of veterans, sources of capital can include personal savings (30 percent) and personal or business credit (nearly 11 percent).
According to the same Experian report, veterans tend to have significantly fewer mentorship options and a lack of networking opportunities. They’ve also historically had less access to capital than their non-veteran owned counterparts, says a report from the Federal Reserve Bank, who together with the SBA assessed the stats of both VOB and non-VOB small businesses.
The SBA’s Office of Advocacy partnered with the Federal Reserve Bank of New York to publish FINANCING THEIR FUTURE: Veteran Entrepreneurs and Capital Access. Their research shows that despite need being strikingly similar amongst VOB and non-VOBs, there is a glaring disparage in lending opportunities for the two groups. It’s one major reason why veteran entrepreneurship continues to see a generational decline.
The report notes that even though VOBs submitted more applications for funding than non-VBOs (47 percent versus 43 percent, respectively, submitted three or more applications), from a larger variety of lenders (online lenders, small banks and large banks), VOBs received less financing overall. During 2010 – 2017, SBA loans to VOBs increased by 48 percent, whereas they increased by 82 percent to non-VOBs. This is despite dedicated veteran-dedicated relief programs.
And some more results of those applications? It’s reported that 60 percent of VOBs still have a financing shortfall due to receiving less funds than they applied for. In comparison, only 52 percent of non-VOBs received less than requested.
The report also points out what we’ve already seen in multiple other studies, that:
“military service is highly correlated with self-employment probability,” and
“veterans are at least 45 percent more likely than those with no active-duty military experience to be self-employed”
What should all this data tell us? It’s pretty clear: we should be putting more faith and funding into VOBs.
Real-Life Success Stories
For those veterans who have been able to find funding through alternative resources, the results are both impressive and inspirational.
Just look at veteran and owner of The Texas Silver Rush, Joseph Remini. Remini creates custom jewelry and is considered a “destination” in Fredericksburg. He’s created custom pieces for the likes of stars including Santana, Ringo Starr and countless other country artists. Reliant Funding’s non-traditional funding options allowed him to purchase the silver he needed to make expensive, custom, one-of-a-kind pieces that are allowing him to make a name for himself. Remini knows that Reliant’s dedication to veterans is something unique.
“I will tell you that Reliant has given me peace of mind. I know I am with a company that cares about me, is willing to grow with me.” – Joseph Remini, The Texas Silver Rush
Christopher Adams is VBO of Cedar Creek Builders and a rental management company. When both companies were growing at a rapid speed, Adams used alternative funding to purchase and replace equipment he desperately needed for a job. Borrowed funds also allowed him to cover unexpected costs during the winter months. His success even meant he was able to purchase a personal condo without concern that it would affect his credit, and ultimately, his ability to access capital to grow his businesses. Adams is grateful for the opportunity non-traditional funding has afforded him.
“Reliant is there when you need funding. It is nice to know and have that peace of mind.” – Christopher Adams, Cedar Creek Builders
Reliant Funding is honored to represent so many veterans in small business. By eliminating origination fees for veteran and active duty service members and their families, and releasing a comprehensive resource guide for veteran owned businesses, Reliant has shown its dedication to the veteran community. We believe knowledge is power, so we’re committed to setting VOBs up with the know how to successfully navigate:
Cash flow management strategies
Funding options and how to use them
Certification as veteran owned business
Training and education opportunities
How to take and apply advice from other successful veteran business owners
If you’re a veteran or family member of a veteran looking for funding and working capital for your new or existing venture, our special offering to veterans and the debut of our VOB guide is proof of our commitment to investing VOBs.
Adam Stettner is the CEO and Founder of Reliant Funding
Over the last half decade, rates of account takeover have multiplied significantly. According to a PYMNTS.com report, account takeovers jumped 300% in 2017, and have been rising ever since. The trend was particularly pronounced in the lending space. Lenders lost $4 billion from account takeovers last year, according to Javelin Strategy and Research. In order […]
Over the last half decade, rates of account takeover have multiplied significantly. According to a PYMNTS.com report, account takeovers jumped 300% in 2017, and have been rising ever since. The trend was particularly pronounced in the lending space. Lenders lost $4 billion from account takeovers last year, according to Javelin Strategy and Research.
In order to combat this type of fraud with innovative technology, lenders must learn what account takeover entails.
Online Lending Fraud: What Is Account Takeover?
Account takeover is a form of financial identity fraud. It’s when a fraudster uses a victim’s identity and financial accounts to fraudulently secure a loan and then steal the funds. Fraudsters apply for a loan in the victim’s name, transfer the funds into the victim’s account, withdrawal the money, and then disappear.
Account takeover is riskier than other forms of identity fraud, but it comes with several advantages for fraudsters who want instant gratification. The fraudster does not need to build a fake identity or financial infrastructure to commit the fraud. The fraudster is essentially taking over a person’s identity, pre-existing accounts, and credit history to illicitly funnel money into a safe haven.
Account takeover is facilitated like most other kinds of identity fraud. A bad actor obtains sensitive information, such as bank account numbers, usernames and passwords, and other key credentials from personal contacts, malware, phishing, or other violations of a victim’s privacy. The fraudster takes out a loan in the victim’s name, and routes the funds into the victim’s account.
Once the funds are in the victim’s account, the fraudster moves the funds into an intermediary account by circumventing bank security protocols. These circumvention methods include SIM swaps, associating new phone numbers with the bank account, SMS-grabbing malware, cloning phone identifiers, and other methods.
After the money is in the intermediary account, the fraudster cashes out the funds by making ATM withdrawals, purchasing cryptocurrencies, transferring funds to online payment platforms, or buying e-commerce goods, among other methods. The fraudster might try to hide the origin of the money by employing “mules,” or agents who transfer illegally obtained money, either wittingly or unwittingly.
Combating Account Takeover with Technology Solutions
Account takeover poses unique challenges to online lending, but novel technologies can help lenders fight back against this form of fraud.
ThreatMetrix by LexisNexis Risk Solutions provides data that detects suspicious behavior or compromised devices before fraudsters can initiate account takeovers. ThreatMetrix’s Digital Identity Network analyzes millions of transactions across billions of devices for thousands of leading global businesses. This data allows organizations to verify that customers are who they say they are.
RSA Web Threat Protection uses behavioral analytics to separate fraudulent activity from legitimate transactions. The solution tracks a large variety of fraud threats, such as new account fraud, fraudulent money transfers, password guessing, credential harvesting, mobile and web session hijacking, and other behaviors that suggest potential account takeover attempts.
Fraud.net has an award-winning AI-powered suite of enterprise tools to manage risk for clients such as online lenders. Fraud.net’s AI, analytics, and data mining platform can quickly identify common schemes and attack methods, including account takeover. The suite’s ‘early-warning’ monitoring, powered by multi-dimensional risk analytics, helps to uncover account takeover fraud before it happens.
Account Takeover: A Manageable Issue With the Right Technology
Account takeover is one of the most expensive and fastest growing forms of online lending fraud. However, with the right solutions, lenders can combat account takeover and minimize the negative impact it has on profit margins, platform security, public image, and the customer experience.
Kevin Bartley is the content manager at Ocrolus.
Headquartered in NYC, Ocrolus is an intelligent automation platform that analyzes financial documents with over 99% accuracy. By eliminating manual reviews, Ocrolus empowers companies to reinvest human capital and automate processes with industry-leading speed and accuracy. Ocrolus services hundreds of customers in the financial sector and analyzes millions of data points every day. The company has raised over $30 million in venture capital, backed by Oak HC/FT, FinTech Collective, Bullpen Capital, and QED Investors, among others. For more information about Ocrolus, visit www.ocrolus.com.
Modern Small and Medium Enterprises (SMEs) represent a significant part of the global economy, accounting for nearly 90% of all modern businesses. Modern SMEs are large contributors to the creation of workplaces and economic growth, especially in developing countries. Although they’ve become a vital part of the financial ecosystem, these businesses are facing extreme difficulties […]
Modern Small and Medium Enterprises (SMEs) represent a significant part of the global economy, accounting for nearly 90% of all modern businesses. Modern SMEs are large contributors to the creation of workplaces and economic growth, especially in developing countries.
Although they’ve become a vital part of the financial ecosystem, these businesses are facing extreme difficulties in accessing finances. SMEs are often associated with higher risks, sizeable transaction costs, and a lack of collateral—about 50% of small business loans get rejected.
Many business owners cite this financial exclusion as a key obstacle to the growth of their venture. The common hurdles in obtaining a loan include burdensome processes, low level of transparency, and the high costs associated with searching for a loan. For instance, the research by the Federal Reserve indicates that small business borrowers spend nearly 24 hours on paperwork alone during the loan application process at a bank.
The problem is global: businesses from East Asia and Pacific regions represent the largest share (46%) of the total number of underbanked SMEs worldwide, followed by Latin America and the Caribbean (23%) and Europe and Central Asia (15%). In 2018, the finance gap between the needs of global SMEs and available funds reached $5.2 trillion, according to SME Finance Forum.
Following the financial crisis of 2008, with the idea of de-risking their balance sheets, large banks started to avoid lending to SMEs by introducing stricter requirements to receive funds. For instance, in the UK, where SMEs represent a tremendous 99.9% share of the 5.7 million businesses, the value of issued bank loans fell to £55.6 million in Q4 of 2018, a 78% drop from its maximum of £255 million in 2009.
The other reasons include the variety of regulations banks have to cope with, insufficient credit history, and the high transaction costs of underwriting and onboarding customers. All in all, providing loans to small businesses has become less of a priority for banks. “If you look at the great recession, what you’ve seen is a bounce-back of commercial lending, but lending to small businesses really hasn’t come back,” sums up Darrell Esch, Vice President of global credit at PayPal. The majority of banks are not interested in lending relatively small amounts of money on a frequent basis. Some banks have introduced a sort of a loan threshold (commonly around $100,000 to $250,000), and won’t engage in loans below this level. The others will not address requests from SMBs with less than $2 million in revenue.
But technology changed the scenery for many small and medium-sized enterprises. In comparison to traditional financial institutions, digital lending companies provide favorable terms on credits. With low-interest margins, faster approval, and without initial fees, they are scaling up quickly and already capitalizing on new scoring methods.
On the Path to Digitalization
Top decision-makers in the banking sphere are aware of the success of alternative lending companies. However, still slowed down by legacy systems, banks are only dipping their toes in digital lending. The outdated technology at banks isn’t the sole issue. At the recent Lending Fintech Europe in London, lga Zoutendijk, a career banker with several decades of experience, said that “legacy culture is a bigger problem at large banks than legacy tech and a much more difficult challenge to overcome.”
For traditional lenders, fintech is an opportunity to innovate and modernize. However, one can’t fight legacy culture alone: on their path to embrace digitalization, bank institutions need a fintech partner to bring technology, speed, and flexibility to the table.
Fintechs are looking for such partnerships as well. With all the improvements in customer experience, they predictably lack the expertise in areas such as risk management, loan monitoring, and servicing that banks have in spades. This mutual knowledge gap creates partnership opportunities. Denise Leonhard from Paypal is sure that “nobody is going to be able to do it alone. To get to the next evolution of payments, it’s going to be really partnership-driven.”
Addressing the Challenge
But what is the biggest challenge in initiating the loan process for banks? Moody’s Analytics, a financial intelligence provider, conducted a poll among bank institutions. The results revealed that 56% of bankers consider manual collection and data processing to be the greatest obstacle in the process of underwriting.
These outdated methods lack consistency, accuracy, and auditability, not to mention, they are time-consuming. This results in additional work for risk officers at a bank, and assessing an SME’s creditworthiness becomes a challenging and unprofitable task. Traditional players just can’t compete with agile, fast-moving alternative lenders and their “time-to-money” credit decisions which take less than a day.
Lending to SMEs is not profitable for banks unless they change their operational approach. The solution lies in the automation of manual processes. Banks have to adopt such solutions for enhanced data collection, scoring, and further rule-based decisions, and solve the problem of the data’s inconsistency and delay. Igor Pejic, the renowned author of Blockchain Babel, sums it up: “It is simply not possible to offer the customers the speed they need in today’s economy with manual processes.”
But what’s more important for banks, those changes mean investing in the future: alternative lending options make customer experience of SMEs convenient, transparent, and adapted to the way those businesses operate.
The Future of SME lending
Partnerships between banks and fintechs are one of the most-discussed topics in the industry as they have the immense potential to impact long-term growth, customer experience and client retention for both parties. Industry professionals agree that bank-fintech collaboration is evolving as a common industry practice that will shape the future of the lending domain.
By partnering with alternative lenders, traditional players fight the challenges associated with the process of credit risk assessment, increase the quality of the loan portfolio, and stay competitive in the SME lending sector. More importantly, they have the opportunity to offer small businesses a shortcut to finance with fast access to cash, less paperwork, and fewer rejected applications.
In return, alternative lenders benefit from partnerships by getting experience in handling a complex regulatory environment, reaching new markets, and scaling quickly. In regards to this, old-fashioned “collaboration” is the new industry trend, while “disruption” is regarded somewhat as a thing of the past. Effectively, change is almost impossible without industry-wide cooperation and consensus.
The question: is how will banks and fintechs manage their respective strengths to proceed with deeper integration in a newly-formed system? It’s important to note that these integrations shouldn’t be regarded as acquisitions by any means. In other words, the technological vision of fintechs shouldn’t be at odds with the slow processes within banking institutions: one needs to convince multiple stakeholders and departments that the partnership makes sense. Here’s Chris Skinner on the partnerships: “Banks are slow to move, particularly at the beginning. Realistically, you should consider allowing at least 12-months from the moment you engage to the moment you have a partnership agreement signed.”
However, the financial industry holds little pessimism about collaborations: 82% of top executives at banking institutions have plans to partner with a fintech within the next 5 years. That’s only a matter of time before both parties streamline their processes to completely change the dynamics of SME lending.
All in all, given the competitive advantages that come with strategic partnerships, banks and fintechs have better chances to achieve their scale ambitions and reinvent their business models.
According to the CGAP report, the global opportunity for SME credit is estimated to be around $8 trillion. At the same time, more than 50% of overall applications are being rejected regularly. If banks want to take their share of the lucrative market, they need to modernize, and that’s totally good news for small businesses, technological partners, and the whole fintech ecosystem.
Dmitri Koteshov is the digital content marketer at HES (HiEnd Systems), a fintech company behind comprehensive lending and credit scoring solutions. As a seasoned professional, Dmitri maintains a longstanding interest in providing insights on fintech software development and analyzing current technology trends.
Internet 1.0 is HTML websites. Internet 2.0 is a social network and user-created content. How is Internet 3.0 coming along? What is Internet 3.0? Are you familiar with Napster, Kazaa, and BitTorrent? Today, Bittorent has met Bitcoin and given birth to the following startups, networks, or organizations: Decentralized computing power. Golem, among others, is a […]
Internet 1.0 is HTML websites. Internet 2.0 is a social network and user-created content.
How is Internet 3.0 coming along?
What is Internet 3.0?
Are you familiar with Napster, Kazaa, and BitTorrent? Today, Bittorent has met Bitcoin and given birth to the following startups, networks, or organizations:
Decentralized computing power. Golem, among others, is a peer-to-peer market for putting your computer’s excess CPU power to use for other people. It works because there is no easy way to pay anybody on the planet fractions of a dollar for having used their CPU for 1 minute. This is, however, possible via blockchain.
Decentralized exchanges. Ether Delta, among others, is a cryptocurrency exchange which operates in a decentralized way (i.e., without a central counterparty). Decentralized exchanges allow peer-to-peer trading, which means that when a trade is executed the items are exchanged directly between the traders without touching any third party, and without the traders being able to stop the exchange. This approach eliminates counter-party risk entirely. On the other side, it also allows people to trade completely anonymously.
Decentralized protocol approval. Tezos, among others, is an open-source platform for assets and applications and allows the participants to vote to change its rules and protocols. Participants can choose to change the fee structure, rules, the protocol APIs, nearly everything. This protocol change-mechanism is built within the network rules, and nobody has the right of veto or override. Imagine if eBay merchants could vote to reduce the eBay fees without the eBay management being able to stop it. Of course, this opens the doors to politics, and also to oligarchies as having more Tezos coins obviously gives you more power to influence the votes.
Other similar companies include but are not limited to:
Decentralized file storage (Filecoin)
Decentralized domain naming (Namecoin)
Decentralized cloud storage (Storj)
Decentralized databases (BigchainDB, IPFS)
Decentralized internet address allocation (JACS)
Decentralized Video Encoding and Streaming (Livepeer).
Decentralize financial services (Bitcoin, Litecoin, etc.) and more.
Other online platforms like Facebook or Google don’t share any of the ad revenue earned from the personal-data exchanged through the platform. They keep 100%.
In addition, all centralized marketplaces and platforms exert full control over who can advertise, who and what can be sold, to whom, where, etc.
Their full control, when the company is young or fragile, is not being exercised much. They want to attract users and customers. However, as the company grows, and pressure from investors and the financial markets increases, the platform position of the de facto monopoly in their sector is usually leveraged to increase fees and to control who and what can be transacted on the platform. For example, Google has a history of banning certain ad categories on its platform. Most people agree that the bans, so far, have been legitimate and are targeting harmful or mostly fraudulent industries from selling their products and services. However, Google’s power of life-or-death over entire industries is troublesome.
In comparison, decentralized networks and organizations have so far mostly tried a few different business models.
Financing and crypto coins
Traditional , centralized, startups sell their equity to investors. Equity is scarce by definition, to 100%. And once sold, investors typically have a contractual right preventing startups from creating more shares and diluting them without their approval.
Equity is a problem in a decentralized project. Equity to what? What does an equity holder control?
Most decentralized organizations mentioned above have created their own crypto coins in order to finance their creation. Their usual business model is to make the coin, artificially or legitimately, a required part of each transaction on their network. As the number of transactions grows and the coin inventory is limited, the coins become more valuable. And the network itself uses its own inventory of coins to finance its expenses. In addition, some decentralized networks also take a percentage of the value exchanged on their platforms.
However, the token approach has, so far, failed to work for most networks.
The most successful tokens today have thousands of active daily addresses.
This is not surprising. All these decentralized organizations are new startups. It takes time for startups to build traction. A handful of them will have millions of users after 3-5 years. Most startups may still be viable businesses even though they only have hundreds of daily active users, but their tokens will not have any real value due to over-inventory. Therefore, maybe relying on token activity and scarcity to finance all decentralized projects may not be a viable way to finance these projects.
I believe an alternative token model is needed for most of these projects. A model that will have significant return to investors even if the network only achieves modest success of 100s of transactions per day. However, this may require an increase in network fees.
The X Open questions of decentralized entities
As I think of decentralization, many questions are on my mind:
What are these entities? Are they businesses, networks, organizations, protocols, or something else? The concept of Decentralized Autonomous Organization, or DAO, has been used in the past. But to my knowledge, no actively operating entity using a real DAO model is live and generating revenue today. All entities have executives, employees, bank accounts, offices, etc. Or is it? The Bitcoin network itself, with all the developers in various organizations who are trying to contribute to it, is fairly decentralized.
Governance: Leaders in centralized entities are required. Often, leaders aren’t any good at taking decisions, but making some decision is often better than not being able to make any decision. Many an organization has died because nothing at all was done. Are decentralized organizations able to make decisions fast and efficiently over 5 to 10 years while they grow?
Are decentralized networks cheaper to run, and do they have a disruptor advantage over centralized networks? It is not clear. Lending Club, one of the first P2P lending startups, argued that their cost structure was cheaper than banks’. However, it turns out the cost of capital lending and cost of customer acquisition were under-estimated and banks have cheaper capital and cheaper customer acquisition. Lending Club’s profit margins are not impressive. Neither is Uber’s. Nor are Amazon’s. I believe there is no single answer to this question, but assuming that a decentralized entity is more cost effective than a centralized entity is not obvious. In human history, disciplined centralized organizations (armies, empires, …) have clearly been more successful than federations, communes, etc.
Is there value built, and where is it? The startup/VC model has worked since the Dot Com boom because it was a profitable model for everybody involved. VCs made money, and successful entrepreneurs attracted more smart wannabe entrepreneurs. It is very important to see the founders and investors in these decentralized organizations be successful or there will be no second generation decentralized entities.
What is the innovation here?
I believe that an exchange that can work without counterparty risk is a real innovation.
I believe that a method to pay fractions of a dollars efficiently to anybody on the planet is a real innovation.
I believe one day we will see the Netflix of Internet 3.0 bankrupt the Blockbuster of Internet 0, 1.0, or 2.0.
However, questions remain. Is decentralization in business similar to communism in politics? Does this model really work? In 1990, in Moscow, everything was rationed, bread was extremely scarce. When a communist leader asked the London mayor who is in charge of the bread supply to London so they can learn their secrets, the mayor, confused, answered “Nobody!” Our modern food supply is a decentralized market, and fewer and fewer people are going hungry.
Artificial intelligence (AI) and machine learning (ML) are ubiquitous in today’s workplace conversations. Turn on any business news channel and you’ll hear them repeated over and over. Ask any venture capitalist and they are sure to brag about several investments in these areas. Google artificial intelligence and machine learning, and you’ll find 213,000,000 hits, and […]
Artificial intelligence (AI) and machine learning (ML) are ubiquitous in today’s workplace conversations. Turn on any business news channel and you’ll hear them repeated over and over. Ask any venture capitalist and they are sure to brag about several investments in these areas. Google artificial intelligence and machine learning, and you’ll find 213,000,000 hits, and rising. Overhyped? We don’t think so.
Accenture boldly claimed that AI could boost average profitability rates by 38% and lead to an economic benefit of $14 trillion by 2035. That is no small statement. Even more astonishing is the general alignment among analysts on this issue. It’s widely agreed that AI and ML hold great promise across all industries, and, specifically, in finance.
In 2019, IDC projected that banking would be the second largest global industry to invest in AI, with $5.6 billion going toward AI-enabled solutions (trailing only retail). Why? The anticipated effect on business. According to the research firm, Autonomous, the financial industry’s slice of the global AI pie represents upwards of $1 trillion in projected cost savings.
Fintech Disruptors and Underwriting
Fintech disruptors, characterized as fast-moving companies, often start-ups, focus on a particular web-based innovative financial technology or process, spanning mobile payments to lending. Fintech disruptors initially found an entry point in finance through the use of AI/ML in underwriting.
In the U.S., if the customer consents, you can gain almost unlimited data about their credit profile: how many loans they have, whether they have a mortgage, if they’re delinquent, and whether they requested credit recently. According to the Brookings Institution, “AI coupled with ML and big data, allows for far larger types of data to be factored into a credit calculation. Examples range from social media profiles, to what type of computer you are using, to what you wear, and where you buy your clothes.” Access to this type of data gave rise to the development of sophisticated algorithms to underwrite consumer credit risk. We’ve seen this across a variety of lending companies offering unsecured consumer, student, or even small business loans, particularly focused on digital lending.
Importantly, though, those employing AI must be hyperaware of data collection practices, model design, and the potential for misuse. There is an inherent obligation when using these powerful tools to avoid profit at any cost. When used responsibly, AI can promote growth and better serve consumers. To meet this goal, companies must focus on creating ecosystems that are exponentially more just and equitable than what we have today.
On the surface, the digital lending numbers seem incredible. Digital lenders have grown to $50 billion in originations per year, not including incumbents. And, the research firm Autonomous notes that the digital lender model continues to raise $5 billion in annual venture capital investment, dominated by investments in the U.S.
And, yet, that same report shows that an AI/ML-driven digitization of the lending process is not headed to zero cost. To date, the cost advantages of onboarding and ongoing servicing (up to 70% reductions) have not been able to overcome the relatively high marketing costs that have yet to effectively scale lower than $250 per loan. Moreover, capital costs can reduce efficacy relative to traditional bank competition, and, then, there are the unplanned expenses, such as legal fees or elevated product development costs, the firm reports.
So, if digital lending driven by AI/ML-powered underwriting cannot deliver a material cost advantage, is further AI/ML advancement possible? And, will it improve outcomes for the consumer? Yes, absolutely. It all boils down to operations. As the use of AI shifts beyond obvious use cases and is deployed cross-functionally across entire companies to address various operational inefficiencies, the real promise emerges.
AI/ML 2.0: Improving Outcomes for Everyone
According to Deloitte, the top 30% of financial services firms who are frontrunners are more adept at integrating AI into the core strategic business of their firms, delivering revenue and cost gains quicker than competitors. In our opinion, this is clearly the case with fintech disruptors. Those that are focused on AI integration throughout the organization will quickly pull ahead of those who limit AI deployments to chatbots, underwriting, and other AI/ML 1.0 use cases.
Fintech disruptors can offer the market’s most cost-effective solutions by dramatically curtailing operation costs. Harnessing large-scale, multi-functional AI systems across organizations, instead of simply deploying in underwriting, presents fintech disruptors the opportunity to control costs at each stage and offer quality outcomes for their customers at reduced costs – with lean workforces.
So, while these systems may not face the end customer in any way – in fact, that may not be visible at all – they are the true future of AI/ML for fintech disruptors.
Fintech disruptor leaders who understand the opportunity to use an interconnected system of AI models across their organizations will likely drive the greatest overall efficiencies, both reducing costs and boosting revenues. This enhanced efficiency can be used to drive competitive position and ultimately higher profits.
AI/ML 2.0 at Work
AI can be used to help allocate resources across a variety of functions. For instance, a lender could create an AI model used to predict which of its retail partners would see the greatest increase in usage as a result of a field visit by a partner support representative. Generally, these visits don’t have uniform outcomes. Therefore, using a model-driven approach could help to allocate resources in the most effective manner. Increasing usage obviously drives overall revenue, but also helps to amortize cost over a greater number of transactions, driving better unit economics. Further, with time, the usefulness of such a system can grow. The more data collected from previous visits, the better the algorithm can be at predicting which visits will yield increasing usage.
Or, a lender could deploy AI in the call center to optimize the efficiency of the collections support team. Outbound reach to delinquent customers could be prioritized based on an ML algorithm that evaluates the potential for a successful call and the expected dollar collection. This may sound simple, but making the “good” calls and avoiding the “bad” ones offers all the obvious advantages of more precise resource allocation.
What is less obvious, though, is how these models are interconnected. The model used in the call center complements the underwriting model. If the collections team performs better, then the underwriting model can be recalibrated to maintain the overall risk of the loan portfolio. If the model prioritizing field visits is working, then it increases usage and reduces the average costs to originate a loan. This further enables a recalibration of both the underwriting model and the collections model. The combination of these models, ultimately, increases both expected and realized returns on the loan portfolio, reducing expenses and allowing the company to pass this savings back to customers in the form of lower rates. This is a win for everyone.
Optimizing the AI/ML Ecosystem
This is the true promise of AI/ML – a robust ecosystem of interdependent models utilized to enhance cross-functional outcomes. This leads to a much broader point: inefficiencies exist in all aspects of business – including accounting, legal, operations, finance and customer experience – and negatively impact profits.
Responsibly managed AI/ML 2.0 promises to address many of these functional silos with great success, improving outcomes for everyone involved.
In 2017, HES designed GiniMachine, an AutoML platform for credit scoring. Since then, we have conducted more than 100 pilot projects for banks, credit unions, and financial companies. What follows is an overview of the top four misconceptions that bank managers have when approaching AI-based business solutions. An Unfathomable Volume of Data It is estimated […]
Needless to say, the sheer quantity of data is growing at an astounding rate. This increase in scale has led to a rise in entropy in the system, which in turn requires a huge number of tasks to be automated and properly managed. This is where AI comes in.
Machine learning allows us to analyze enormous quantities of information at a much greater speed than a human being ever could while also minimizing the risk of errors that so often occur when mere mortals do the work.
Myth #1: AI is Always a Black Box
The black box challenge has been argued over and debated for years.
When lending algorithms arrive at a final decision, quite often it’s unclear why. We know that a loan application is denied, but we don’t know if it was because of a payment history issue, because the applicant is young, or something else entirely.
“The more accurate the algorithm, the harder it is to interpret, especially with deep learning networks,” points out Sameer Singh, assistant professor of computer science at the University of California, Irvine.
Today, different tools like feature and permutation importance, and methods like the SHARP method, can be used to make sense of black box AI models. For an in-depth look at the techniques for interpreting black box AI models, have a look at these two articles:
The easiest way to achieve interpretability is to use algorithms that create interpretable models, such as linear regression, logistic regression, tree-based models, rule-fits, Naive Bayes, and k-nearest neighbors.
Christoph Molnar’s book ‘Interpretable Machine Learning’ covers all the various algorithms.
AI-based dynamic systems are here to stay, however, the general public is highly unlikely to simply turn over their fate to an all-knowing black box system. Any institution that wants to retain its credibility will be forced to embrace XAI to make sure that it has the accountability and transparency necessary to maintain the public trust.
Myth #2: Datasets Must be Prepared by Data Scientists
As Andrew Ng points out in his Space Rocket Analogy, machine learning models that provide actionable results are fueled by data. Without data, the AI rocket just won’t fly.
The quality of the dataset will affect the quality of the predictive model. This means that machine learning algorithms require data to be prepared and formatted in a specific way.
Historical “raw” data is generally inaccurate as it may have missing values and outliers, or it might simply just have invalid data formats. That’s where a data scientist comes in.
Data scientists usually engineer the data, spending weeks or months on this step. And data science is not a simple matter. It requires a blend of domain knowledge, math and statistics expertise, as well as code hacking skills.
But here’s the good news that nobody is telling you: You don’t need a data science team to get value from your data. The key to minimizing your data science needs is having the right technology: Technology that allows a data analyst to contribute in a meaningful way to data projects. Today, advanced ML platforms can perform perfectly with historical data without any preliminary analysis or data pre-processing.
Myth #3: AI Costs a Fortune
These days, AI is everywhere, and figuring out how to harness it is popular in any business. Despite its ubiquity, many still believe that only massive enterprises have the budget to invest the supposed millions of dollars it takes to purchase AI-based technologies.
Why is AI now affordable?
As mentioned above, it is no longer necessary to hire a data scientist. The New York Times reported the cost of a “typical” AI specialist ranges from $300,000 to $500,000 a year between salary and stock options.
Ready-to-use developer tools are now widely available. In the past, AI-based solutions (i.e. Matlab, and SAS) were over-qualified and far too expensive. Now, feature-rich packages are available for Python — they offer almost identical functionality as their premium competition, but at a fraction of the cost.
The price of an AI-based system varies depending on the number of subsystems that a company chooses to implement. For example, if an enterprise needs a chatbot it can be as low as $15,000 depending on the complexity of the system. A subscription underwriting system for a SaaS platform can be purchased for only $1,000-$5,000 a month depending on the number of loan requests.
Myth #4: Risk Experts Don’t Need AI
The world is witnessing the biggest man-machine collaboration in history. The fear that AI will become smarter than humans and replace them is exaggerated in pop culture. Though some jobs will inevitably disappear, the remaining risk experts will find their work more fulfilling and stimulating than ever. It’s important to remember that AI is not the expert; it’s a tool for helping experts.
The benefits of AI for risk officers and data analysts.
AI saves thousands of hours of manual processing, which means humans no longer need to perform tedious, repetitive tasks.
At the enterprise level, AI means enhanced automation of administrative tasks, reduction of the overall workload, and a decrease in operational costs and labor.
AI leads to better performance for risk experts. AI unlocks the ability to exploit hidden dependencies that are otherwise very difficult for humans to find on their own.
The purpose of AI is to provide a fast and secure backbone for risk management. But without experts, it’s nothing. It’s humans who train machines to perform tasks: Humans who understand the outcomes of those tasks, and humans who sustain the responsible use of machines for the benefit of other humans.
Redesign Risk Management
To get the most value from AI, companies must first discover and describe an operational area that can be improved. It might be a high churn rate, a balky credit scoring process, or half-powered historical data usage. AI can help to surface previously invisible problems and reduce current challenges.
Let’s not forget that issuing good loans is not just for enriching banks and lending institutions. Issuing loans helps recipients pursue their interests and enrich their lives. Risk officers have a duty to use all the tools at their disposal to this end, for the benefit of both parties.
Natalie Pavlovskaya is the chief marketing officer at HES (HiEnd Systems), a fintech company behind comprehensive lending and credit scoring solutions. She is a marketing executive with international business experience in CIS, EMEA, and US, working for more than seven years in digital marketing.
With several fintech companies reporting earnings disappointments over the last two weeks and with FinTech Unicorn GreenSky, Inc. (GSKY) that IPO’d less than fifteen months ago now considering strategic alternatives, both public market and private equity investors have to consider the longer tail implications for the sector. Is the public market fairly valuing the underlying […]
With several fintech companies reporting earnings disappointments over the last two weeks and with FinTech Unicorn GreenSky, Inc. (GSKY) that IPO’d less than fifteen months ago now considering strategic alternatives, both public market and private equity investors have to consider the longer tail implications for the sector. Is the public market fairly valuing the underlying business fundamentals and growth opportunities being pursued by fintech companies? Should GreenSky have stayed private? And given the GreenSky situation, will other FinTechs be able to gain access to much needed capital (both public and private) for further growth and value creation?
GreenSky has repeatedly under delivered relative to market expectations. The company reported second quarter earnings last week of $0.19 (versus consensus expectations of $0.23) due to weaker-than-expected lending volume. Not only were earnings short of expectations but transaction volumes grew 20% year-over-year when the company had indicated that it would deliver 30% growth. Add to these disappointing performance metrics the fact that one of GreenSky’s bank partners announced it would not renew its asset buying relationship with the company and GreenSky is now looking for alternative funding arrangements. All of this news was eclipsed by management announcing that it is considering “strategic alternatives”. The stock declined 37% on the day the quarter’s results were announced, driving its 21% underperformance for 2019 and adding to its 67% decline since its IPO just last May.
Public companies have nowhere to hide when things do not go as planned. When expectations are repeatedly not met and business models do not deliver the profits that technology-enabled business models suggest should be produced, recently minted public companies are punished severely. Public companies cannot contain the bad news to the board room where private equity investors complain loudly but their complaints lack the echo chamber of the public markets. GSKY cannot do a down round in private and has to take its lumps in public. There was similar news for OnDeck (ONDK) last week when it announced alongside its earnings that JPMorgan Chase (JPM) was ending its loan origination partnership (ONDK shares declined 23% that day and is down 43% YTD, and off 83% since its IPO). The FinTech world was banking on these bell weather companies delivering strong, sustainable business models that would reshape the financial services landscape. So far, this is not what happened.
GSKY’s and ONDK’s woes are only the beginning for private fintech companies. Earlier stage FinTechs look to the public FinTechs as reference points and hope that they can replicate their IPOs and deliver sustainable growth. GreenSky could have been that shining success, but it appears to be example of what can go wrong when a FinTech goes public. Growth stage companies tell their private investors that if they grow fast enough and big enough, they can go public — like public companies GSKY and ONDK. But, when these companies underperform with significant market value erosion and talk about exiting the public market, it sends shudders down the backs of private lenders and the investors who back them.
What are the lessons that private companies can glean from the disappointing news coming from the public FinTechs? Under promising is a winning strategy. Fin-techs have to stop falling into the trap of setting expectations so high that they miss delivering against them. The public market has demonstrated that newly minted public companies will be severely punished for missing performance targets. And while founders want big valuations and private equity investors need big write ups to be viewed as successful, they would both be far better served setting expectations lower by accepting lower initial public valuations and thereby allowing themselves to set lower performance targets for the 12 to 24 months after they IPO. This sort of thinking may seem logical to observers of this market, but when you are neck deep in the FinTech market as an operator, investor or banker, it is hard to avoid overheating expectations and valuation. With each capital raise leading to quantum leaps in valuations, private companies have to set very heady goals for their IPOs and for the year post going public. After all, the IPO buyers need a big return too. And this dynamic has ended recently with a very disillusioned FinTech market. If we wish to see FinTech deliver on the promise of next-generation financial services with transformational value add, better economics, and broad adoption, we have to give these companies the time to grow into world beaters. It cannot happen overnight and promising such only leads to creating a cynical market that will think twice about investing in early-stage and later-stage FinTech innovators.
Andrew Marquardt is a partner at Middlemarch Partners, LLC, a merchant banking firm that advises and invests in financial services companies, with a particular focus on fintech and tech-enabled growth companies.
Non-prime lending has revolutionized the lending sector. In times where people lack a stable credit history, securing a traditional loan is not easy—and non-prime has become a go-to option in such scenarios. In the past few years, alternative financial services have gained momentum in terms of acceptability and volume. There are various companies in the […]
Non-prime lending has revolutionized the lending sector. In times where people lack a stable credit history, securing a traditional loan is not easy—and non-prime has become a go-to option in such scenarios. In the past few years, alternative financial services have gained momentum in terms of acceptability and volume. There are various companies in the market that offer instant loans even to the borrowers who have a weak credit history. But how do we infer how many people have migrated to non-prime online borrowing from the traditional borrowing set up, and how many people have migrated back to the traditional set up?
Experian’s Clarity Services, a credit reporting agency specializing in near prime and subprime consumers, offers credit data to alternative financial service (AFS) providers. This helps lenders gain a wider perspective of non-prime applicants and further enables them to make more informed decisions.
The company furnishes the AFS trends report that specifies the prevailing trends and consumer behavior in the market by studying the underlying factors. In the 2019 AFS Lending Trends Report, Clarity studied a sample of 350 million consumer loan applications and more than 25 million loans to evaluate the market trends for the 2014 to 2018 time period. Clarity also leveraged Experian’s national credit bureau data to analyze consumer behavior.
Alternative Financial Services — What Do the Market Trends Say?
Non-prime consumers include people who may have been irresponsible with credit previously, youngsters with inadequate credit history, people who face sudden and unexpected emergencies, recent immigrants in the US or someone in immediate need of cash. The basis for the report includes factors of loan origination (involves the online and storefront channels) and loan types (includes installment payments and single pay).
In order to study the rise of the online lending market from 2014 to 2018, Clarity studied online installment and single pay loans by the number of loans originated and total dollars funded.
The graphs illustrate how online installment loans have been steadily growing from 2014 to 2018. The volume of online installment loans in 2018 was 7.4 times higher than the volume in 2014. Whereas, the volume grew up until 2016 in the case of online single pay loans, plummeted in 2017 and held steady in 2018.
As per the report, more than half of online borrowers are new to the alternative credit space. The table below illustrates the consumers who opened an online loan in 2018, tracking their past behavior from 2014 to 2018.
Clarity also tracked the activity of 2017 alternative financial borrowers in 2018 and if they continued with online platforms. The results showed that 41% of online borrowers again availed an alternative loan, while 24% of the borrowers did not show up in 2018. Also, 35% of the borrowers applied for a loan but did not open one.
Further investigations gave another interesting insight. Around 34% of 2017 borrowers who did not have any applications or loans in 2018 had switched to traditional lenders. This implies that 7% of overall 2017 borrowers migrated to traditional lending in 2018.
As per an examination of the credit classification of consumers who obtained and did not obtain loans from traditional lenders in 2018, 23% of borrowers who switched to traditional lending possessed a near prime credit score, and only 8% of the borrowers continuing in the alternative finance space were classified as near prime.
Factors Influencing Migration from Online Platforms to Traditional
While the migration of borrowers from AFS platforms to traditional ones might not be a shocker, borrowers who had a subprime credit score and were ineligible to apply for traditional loans were mostly the ones who moved to online or the AFS space to get the credit they needed. As and when their credit scores improved, they reverted to the traditional space. While AFS is convenient in terms of credit scores and repayments, there are strong factors that influence the borrowers to move back to traditional methods.
Frauds: With the advent of technology, fraud too has evolved. With data breaches, the fraudsters create a synthetic identity that cannot be easily decoded. This is leveraged by fraudsters to open fake and additional accounts.
Generation Bias: Gen X is more comfortable with online borrowing and less likely to be inclined towards storefront options. Another study under the report implies that the Silent and Boomer generations only account for 25% to 30% of all AFS borrowers.
Income Trends: In the past five years, online installment borrowers reported a higher income (while the values have been steady since 2016) and the reported incomes of storefront installment borrowers have been stagnant since 2014.
Due to the recession in 2008, the majority of borrowers had suffered a hit to their credit worthiness. On the other side, traditional lenders folded due to the toxic asset built up in their balance sheets. This created a vacuum for the AFS players to capture. It was a win-win as they were able to tap into a multi-hundred-billion-dollar market unchallenged, and the affected borrowers got a chance to get the credit they needed desperately.
With record economic growth, the 2019 scenario is different. Borrowers are returning to traditional ways of borrowing. The trends report puts light on the activities of the borrowers and how their needs have changed over time. In the given scenario, Clarity’s alternative credit data is a key asset when studying borrower behavior in the market.
Introduction Online lenders are fast becoming the first port of call to avail loans and have been attracting strong funding interest from VCs and PEs. This demand for a digital lending experience has also forced traditional lenders like banks and credit unions to figure out the technology which will allow them to originate loans in […]
Online lenders are fast becoming the first port of call to avail loans and have been attracting strong funding interest from VCs and PEs. This demand for a digital lending experience has also forced traditional lenders like banks and credit unions to figure out the technology which will allow them to originate loans in a flexible yet scaleable way. They have two options: Buy or Build.
The build option can be extremely expensive and time consuming. But the buy option leads to a digital experience that is constrained, as you are dependent the features and functionalities of the vendor. Moreover, there is no way to really differentiate in the eyes of the digital customer. The solution is DigiFi: an open source tech platform which also allows you to customize along with a layer of additional services like hosting, support, platform implementation, etc.
DigiFi was founded by Joshua Jersey and Bradley Vanderstarren in 2014. It started its life as Promise Financial, an online lender, and raised $110 million in credit capital. It built up its own proprietary tech as there was no solution provider in 2014 offering an end-to-end loan origination platform that could automate the entire process. They sold off the tech to a large lending institution in 2017 and pivoted to DigiFi, one of the world’s first open source loan origination systems (LOS) which equips the lenders with flexible and modern tools to create unique platforms and digital experiences.
The company’s ideology is simple: That is to give other incumbent lenders, branches, credit unions, and startup digital lenders a platform where they do not struggle to build core lending capabilities from scratch. The company utilized the year 2017 and early 2018 to build up its platform, and started working with clients in late 2018. The company, with 10 people, has raised $4 million in equity to date and is based in New York.
The Market’s Pain Points and the DigiFi Solution
The ‘build or buy’ question creates a space for a platform that can bring together the qualities that fulfill the core origination requirements of the lending market and yet customize to give the client a competitive edge over other players. DigiFi empowers its clients to control the features and UI/UX so that it suits the specific needs of their unique client base. The existing tech vendors force the lenders into a rigid structure that limits flexibility to differentiate and provides the exact same experience for all sets of clients.
DigiFi gives the best of ‘buy vs. build’. Thus, DigiFi clients do not need to start from scratch and yet have the power to tailor the tech (buy and build, a win-win!). The company’s core platform is open source, and the source code can be accessed on Github. Revenue is generated from acting as a layer that provides hosting, support, platform implementation and customization services.
In crux, the platform of the company has features like complete lending CRM, decision engine for lending decisions, machine learning environment, and open-API architecture, and it can be configured for deployment across a range of lending verticals that include consumer, mortgage, small business, and commercial. DigiFi gives out the open source platform and its documentation for free.
The platform of the company is currently being leveraged by Sprout Mortgage, Mariner Finance, Constant Energy Capital, Greenwave, and Home Point Financial.
The Platform in Detail
The company provides its platform to the lenders for free and charges for additional services of configuration, setup, support, and running. Depending on the requirements of the client, DigiFi offers support plans for a monthly fee. The customization and platform implementation are charged on an hourly basis. The implementation time and cost varies. The implementation might take up to 4-8 weeks at a minimum and can take up to months if the lender needs to build out features from scratch. As compared to years and millions of dollars for building an in–house model, the DigiFi solution is usually in the 5-6 figure range.
As per the CEO of DigiFI, the incumbents are getting better with time as they have a lower cost of capital and existing customer base, positioning them to succeed. Getting the right tech partner on board is thus the critical piece to build a successful moat.
DigiFi offers a platform to lenders looking to tap the online lending market that not only equips them to get the best of the ‘buy vs. build’ system but also ensures full support and customization. It powers the lender with ready-made solutions, fast implementation, support and training, feature controls, unique customizations, flexible hosting options, and a contributor community. It provides the option to integrate all major data sources – Transunion, Equifax, Experian, MicroBilt, LexisNexis, etc. With over 45,000 development hours, DigiFi platform provides it clients a strong barrier to entry with complete configurability with other APIs, true scaleability with AWS, and integrated AI ML solutions.