Banks have to struggle with a lot of challenges – from issuing credit to operational risks, and technological troubles to good old fashion fraud. In addition to the risks of yesteryear, modern banks face falling long-term rates, growing fintech competition, and low profitability. In this challenging environment, savvy modern banks focus more of their attention […]
Banks have to struggle with a lot of challenges – from issuing credit to operational risks, and technological troubles to good old fashion fraud. In addition to the risks of yesteryear, modern banks face falling long-term rates, growing fintech competition, and low profitability. In this challenging environment, savvy modern banks focus more of their attention to mitigating risks.
Chief among these challenges are low-performing loan portfolios, which are a constant thorn in the side of lenders. For example, European non-performing loans stand above €1 trillion with more than one third of banks having NPL ratios above 10% (ECB, 2017).
This minefield of factors has driven lenders to seek out new ways to increase profits and cut funding costs in order to stay competitive.
Artificial Intelligence in Fintech: Will it take over?
“AI is a powerful tool for banks, thanks to its ability to harness vast quantities of data to learn more about customer patterns and behaviors”, says Steve Ellis, head of the innovation group at Wells Fargo.
As powerful as artificial intelligence (AI) is, traditional banking is still heavily reliant on statistical methods that were developed over half a century ago. Lenders determine creditworthiness based on 20+ data points, which leave otherwise worthy customers behind.
Modern machine learning (ML) makes it possible to go much deeper when analyzing data, and allows lenders to extract valuable insights from available data patterns.
According to a McKinsey report, a number of European banks have already replaced the antiquated statistical-modeling approach with machine-learning techniques. The results speak for themselves: a 10% increase in the sale of new products, 20% savings in capital expenditures, and a 20% decline in churn.
The data doesn’t lie: Lenders are betting on AI. Evidence of this modern trend can be seen in numerous ‘banks and fintech collaborations’ and AI-based software releases:
JPMorgan Chase pioneered a Contract Intelligence platform designed to “analyze legal documents and extract important data points.”
American MobileBank deploys AI software to lend to thin-file millennials.
Canadian TD Bank uses Layer 6’s AI engine for scoring and cybersecurity.
Deutsche Bank came out with new AI-based equities to predict their pricing and volume more accurately.
Wells Fargo employs its own AI team to provide more personalized services and strengthen digital offerings.
Bank of America Merrill Lynch implements HighRadius’ AI solution to speed up receivables reconciliation for their large business clients.
Logistic regression is no longer the de facto standard
Nine times out of 10, logistic regression is used to build scoring models and solve classification issues. Before it can take over and provide predictive results, there’s an important step of preliminary analysis and data quality control that must be taken. If the dataset contains:
imperfect and missing values, outliers and unstructured data;
numerical and categorical values (age, income vs marital status, education);
raw data that doesn’t fit strict parameters(data with fractions or decimals, etc.)
data analysts will spend days (if not weeks) just to preprocess the data before it can be assessed. Cutting corners and ignoring such data may lead to the loss of valuable insight and incorrect predictions.
How modern AI/ML methods build better risk models
Today, lenders have the ability to collect more data than ever about their clients. In addition to traditional socio-demographic data, this may include transactional data, records from credit bureaus, social media, Google Analytics, as well as other non-traditional sources.
Processing and interpreting this data so that it can be used to issue loans to worthy credit seekers is where modern ML/AI methods give banks the edge they need.
Machine learning techniques like gradient boosting, random forest, or neural networks can better find hidden dependencies in a dataset, which helps to gain more accurate predictions. This assists banks in determining how collected parameters in a dataset should be weighed to predict whether borrowers will consistently repay their loans on time.
This is made possible by data signals, which define significant parameters that affect the power of a scoring model. Depending on the type of business, geography, target audience, and data authenticity, significant parameters may differ. Modern ML can determine which data points contain the desired signal.
Traditional data sources like credit bureaus still remain an important part of the process and provide the data that contain the above-mentioned signal. Unfortunately, they do not cover noteworthy market segments such as millennials, self-employed entrepreneurs, small business owners, immigrants, or the unbanked.
The team at GiniMachine carried out pilot projects to build accurate scoring models with minimal data points and without access to an applicant’s credit history. Some of the most promising and predictive parameters included the applicant’s industry and occupation, the size of their company, the total years they’d been in business, the size of their family, and data from social networks like their overall activity, as well as the quantity and quality of their connections.
The team at GiniMachine has proven that it is possible to capitalize on information about borrowers that is collected from alternative sources to accurately and efficiently assess borrower’s credibility and make effective lending decisions.
Modern ML methods can build more accurate risk models because of their capacity to:
use built-in ‘raw’ data pre-processing tools
find hidden dependencies of arbitrary complexity
harness unstructured, big data, and data from alternative sources
The financial world, and lending businesses in particular, have seen major changes throughout the last few years. Using ML and AI in concert with traditional practices is the way forward for banks that want to remain competitive in the modern world. It’s clear that making good loans to the people of the future requires a futuristic helping hand.
Dmitry Dolgorukov is a CEO and co-founder of GiniMachine & HES, a technology entrepreneur, and an investor with over 15 years of executive experience in software development and fintech. In 2018, Dmitry was ranked as one of the top 200 Fintech leaders in Europe that contribute to the industry as influencers through action.
News Comments Today’s main news: Citi launches mortgage platform. Credit card debt hits all-time high. The House Crowd receives FCA authorization. Apples for Oranges, an Isa comparison site, launches. Ant Financial dupes users into joining credit system, then apologizes. Ant Financial halts consumer loan sales. P2P lending association launches in India. TD Bank acquires AI company Layer 6. Today’s main analysis: LendingTree’s […]
Citi launches mortgage platform. AT: “This is a smart move. Mortgage online lending is still early on its development and a bank getting in before any real established alternative players have begun to dominate means Citi can throw its financial might behind the platform. That doesn’t mean it will emerge as a major contender. The platform still has to compete on service and technology, but getting an early start is a boon.”
LendingTree Personal Loan Offers Report for December 2017. AT: “Is this a sign that prime lending is increasing? When you consider that the two most frequent inquiries for personal loans are debt consolidation and credit card refinance, it just may mean exactly that. When consumers improve their credit scores, they tend to see out refinancing and consolidation to take advantage of lower interest rates.”
LendingClub (NYSE: LC) today announced that on January 2, 2018, its Board of Directors (the ‘Board’) received another letter from IEG Holdings Corporation (‘IEG’), which had previously commenced an unsolicited tender offer for LendingClub’s stock in July 2017 and withdrew the tender offer less than a month later. IEG’s letter states its intention to acquire up to 4.99% of the outstanding common stock of LendingClub on the basis of 13 shares of IEG common stock for each share of LendingClub common stock. On January 5, 2018, IEG announced the commencement of its proposed exchange offer. The Board believes there is no rational economic basis upon which LendingClub stockholders should accept IEG’s proposed exchange offer, which appears intended to mislead investors into mistakenly tendering into a discounted offer. The Board has unanimously concluded the offer is grossly inadequate, is not in the best interests of LendingClub and its stockholders and urges stockholders not to be misled into tendering into the offer.
Citi has made dual agreements to integrate its suite of US mortgage products into a single digital platform for its clients.
A new front-end digital solution, LoanFx, from Digital Risk, a provider of technology platforms and services, will be complemented by a new loan origination system, LoanSphere Empower, from Black Knight.
The bank says this development will enable its mortgage clients to go through the full loan cycle, from research to application, processing, scheduling appraisals, handling title, to closing, “through the channel of their choice – and at their own pace”.
Since a HELOC is backed by an asset, interest rates are typically lower than an unsecured loan, such as the ones offered by LendingClub and Prosper. There was an added benefit to a HELOC with the ability to deduct the interest, something that differentiated HELOCs from pretty much all other loan products. Now that this benefit is, in many cases, removed with the new tax code, we may see homeowners opt for other loan types. It is important to remember that the interest deduction only benefited individuals who itemize their deductions, which tend to include individuals with higher incomes.
Unsecured Lenders May Benefit
As the deduction benefit is removed, other options which offer a pleasant user experience look even better. Platforms like Goldman Sachs’ Marcus charge no origination fee and currently offer fixed rates as low as 6.99% for the best borrowers. Another player in the unsecured consumer lending space called LightStream offers loans as low as 2.49% depending on the use of proceeds. This could lead to the very best borrowers moving to products offered by these companies while borrowers with a less than perfect credit history, who would qualify for a higher rate, may rely on HELOCs.
Community banks approved 49 percent of SMB loan applications in November, according to the latest data from the Biz2Credit Small Business Lending Index.
But small business lending is only one part of the banking puzzle. SMBs demand access to robust solutions, from mobile banking to advisory services.
The Fed released a report, “Community Banking in the 21st Century,” last October, which surveyed more than 600 FIs. While analysts found small business lending dropped by 2.2 percent in 2016, the decline was significantly smaller than that at larger banks, which reduced SMB lending by 5.1 percent.
On Monday, TD Bank released its 2017 Treasury Management Survey, which revealed that technological innovation and disruption is set to greatly influence the investment priorities and business plans of financial executives.
The survey noted that disruptive technologies are top of mind for the participants, who also cited that they are preparing for changes in the treasury management industry by:
Leveraging solutions from fintech providers (31%)
Developing in-house technology for competition (23%)
Criticism of payday lenders is well-earned. They have devised a system that rolls customers into one 300% annual interest loan after another, until those customers very often reach a point of serious financial desperation — they may lose their bank accounts and are more likely to declare bankruptcy than nonpayday borrowers.
In 2015, over 83% of Florida payday loans went to borrowers stuck in seven or more loans, based on data from the office of the regulator himself. The average annual interest rate is still 278%, and these unscrupulous lenders drain $311 million out of the economy every year, disproportionately affecting African-American and Latino communities and a growing number of seniors.
This webinar series provides a guided tour of the various borrowing options available to businesses, from both a business and legal perspective. Major topics covered include asset-based lending, P/O Finance, Factoring, Merchant Cash Advances, and Market Place Lending / Fintech.
The first episode of the series, Understanding the Lending Landscape, airs on January 17th at 2:00 PM CST (Register Here) and features Moderator Jonathan Friedland of Sugar Felsenthal Grais & Hammer.
Future episodes in the series include “Asset-Based Lending,” airing on February 21st, “Purchase Order Finance” airing on March 21st, “Factoring,” airing on April 18th, “Merchant Cash Advances” airing on May 23rd, and “Marketplace Lending/Fintech,” aring on June 20th.
Marlette Funding, LLC, the parent company of Best Egg, is pleased to announce the appointment of Mark Elbaum as the company’s new chief financial officer (CFO). As CFO, Elbaum will join the executive management team and lead the finance, accounting and capital markets activities from the company’s headquarters in Wilmington, DE.
Most recently, Mark was the CFO of Merrill Lynch, Bank of America’s Wealth Management business. Prior roles included 18 years in the mortgage industry as CFO of Bank of America’s mortgage lending division, appointed to the position after the company’s acquisition of Countrywide Financial. At Countrywide he held the position of CFO of the Residential Lending Division. After starting his career at Price Waterhouse, Mark worked at Aames Financial Corp, a midsize consumer finance company, where he helped upgrade the finance capabilities to post IPO requirements. Mark has a Masters in Accountancy from University of Southern California and is a CPA and experienced in FP&A as well as capital markets.
LendingTree, Inc. (NASDAQ: TREE), operator of LendingTree.com, the nation’s leading online loan marketplace, today announced that it will participate in Needham & Company’s 20th Annual Growth Conference at the Lotte New York Palace Hotel in New York City.
The Company is scheduled to present on Wednesday, January 17 at 10:00am ET.
Enacomm, Inc., a provider of intelligent interactions and customer authentication technologies for banks, credit unions and credit card companies, has teamed up with Advantel, a technology solutions provider deploying integrated voice and data solutions for clients around the world. Through the partnership agreement, Advantel will make available to financial institutions both VPA (Virtual Personal Assistant) banking and the Enacomm Financial Suite (EFS), which includes a hosted, dynamic interactive voice response (IVR) system for personalized customer interactions.
A new Isa comparison site, including Innovative Finance Isas, has been launched directly to potential investors.
Apples for Oranges will allow customers to shop around for Isas and be able to see the different returns from stocks and shares, cash and innovative finance Isas in the same place.
Figures last Autumn showed that investors had put just £17m into Innovative Finance Isas in their first year in existence, according to data from HM Revenue & Customs, significantly less than both stocks and shares Isas and cash Isas, which had £22bn and £39bn put into them respectively during 2016 to 2017.
Released today and based on a survey of 70 alternatives investors, “How to Meet Operational Challenges while Pursuing Opportunities in Alternative Investing” illustrates the alignments and disconnects between those investors and the managers with whom they allocate capital.
The trend toward greater transparency is well established, but expectations continue to outpace reality, as many investors remain dissatisfied with the level of transparency available to them. While 67 per cent of managers surveyed thought existing levels of transparency surrounding operating expenses were sufficient, only 25 per cent of investors agreed. Additionally, almost nine out of 10 investors say it was important (or extremely important) that they are given the opportunity to negotiate fees, yet this negotiation occurred far more often with the larger investor than with those at lower asset levels: 73 per cent of investors with more than USD25 billion of assets reported they had success negotiating fees compared to only 29 per cent of those with less than USD1 billion of assets.
Ant Financial, the internet finance behemoth controlled by billionaire Alibaba founder Jack Ma, has apologized for roping unsuspecting users into its fledgling but fast-growing credit-score system.
Ant Financial’s Alipay kicked off a free service this week to help users generate a consumption profile based on their shopping history. But buried at the bottom of its landing page was a small box — checked by default — that automatically enrolled users to its Sesame Credit unless they opted out. The subsequent online uproar prompted Ant to change that setting and to call the move “extremely idiotic,” according to a post on its official social media account.
After selling billions of dollars of debt backed by consumer loans last year, Chinese billionaire Jack Ma’s Ant Financial is pausing such fundraising as the government steps up curbs on micro lending.
The company hasn’t sold any asset-backed securities since early December, according to data compiled by Bloomberg and China Securitization Analytics. That marks an abrupt shift after it issued a record 238 billion yuan ($37 billion) in 2017 of such securities backed by consumer loans.
China is moving to eradicate the country’s bitcoin mining industry over concerns about excessive electricity consumption and financial risk, reflecting authorities’ judgment that cryptocurrencies are not a strategic industry.
Money transfer company TransferWise has begun a private launch of its “Borderless account” for consumers. It marks the first time the European unicorn has offered a debit card (pictured below), a move that is bound to draw further comparisons with newer fintech upstarts such as Revolut.
Initially rolling out to a thousand customers, with several thousand more to be invited in the coming weeks and a full public launch pegged for Q1 this year, the online banking account gives you local bank details for the U.K., U.S., Australia and Europe, and lets you hold and convert 28 currencies.
If, like me, you receive income from abroad and in a different currency to your home bank account (as a contractor for TechCrunch, I’m paid in U.S. dollars), then you are very likely hit by extra bank charges and an uncompetitive exchange rate by your existing bank. This could be avoided if you had a local bank account in the country and currency you are paid in, and could then choose when and how to do the currency exchange.
The companies were selected from a pool of 2,000+ startups based on several criteria, including investor profile, tech innovation, team strength, patent activity, mosaic score, funding history, valuation, and business model.
Nets Group, the largest Nordic-based payment service provider, announced its newest strategic partnership with Plug and Play, a global matchmaker for startups, corporations, and investors. They joined Plug and Play FinTech’s innovation platform to engage in both the European and North American startup ecosystem. This collaboration will introduce Nets Group to top tier startups that align with their innovation strategy.
India’s leading peer-to-peer lending companies on Wednesday said they have come together to form the Association of P2P Lending Platforms. The first-of-its-kind association will act as a representative for its members, as well as the country’s P2P lending industry. In addition, the association will work in conjunction with the government and regulatory authorities in matters of compliance, and to further the cause of financial inclusion in the country.
The association also intends to undertake research and development, collect data and conduct surveys that will further the development of the P2P lending industry in India. The research and its findings will be shared publicly, and exchange of ideas will be encouraged through various conferences, lectures and sponsored events.
Other founding members include Bhavin Patel, Founder and CEO, LenDenClub and Bhuvan Rustagi, Co-Founder and COO, Lendbox.in who will be the association’s Secretary and Treasurer respectively.P2P lending, Vinay Mathews,Faircent.com,Shankar Vaddadi, i-lend.in, Bhavin Patel, LenDenClub,Bhuvan Rustagi, Lendbox.in
Private sector lender ICICI Bank and ride-sharing app Ola have signed an agreement to offer a range of integrated services to their customers.
Through this alliance, ICICI Bank customers can book Ola and pay the fare by using the bank’s mobile banking applications, ‘iMobile’ and ‘Pockets’.
The facility will also help Ola customers to get small ticket digital credit instantaneously from ICICI Bank, on the Ola platform, a statement said, adding it will also enable digital payments to driver partners.
i2ifunding applies for NBFC-P2P licence
Peer-to-peer lending platform i2ifunding has applied for registration certificate from RBI to operate as non- banking financial company-peer-to-peer lending (P2P).
The other pending issue is completing the formation of a Payments Regulatory Board, which was set up through an amendment to the Payment and Settlement Systems Act.
Finally, RBI’s guidelines on peer-to-peer (P2P) lending need further refinement to bolster the nation’s growing fintech credentials. The rules have confusing eligibility criteria, are ultra-conservative in lender exposure limits and allocate too much discretionary power to the central bank without spelling out specific trigger points for regulatory action.
Muthoot Pappachan Group, a Kerala-based lending and financial services conglomerate, plans to make strategic investments in fintech start-ups as part of a larger digital transformation exercise to drive synergies and profitability among its business units, as it chalks out a plan to list its flagship lending arm Muthoot Fincorp Ltd, a top company executive said.
The group may look to invest $1-5 million in each deal, he added.
A key focus is technology solutions that will help the organisation disburse loans faster and conveniently to its target low-income customers. This will be achieved by exploring non-traditional data sources for credit appraisal, innovative repayment models and assistive technology solutions at branches.
Muthoot Pappachan recently invested in two start-ups: peer-to-peer lending platform Faircent and RemitGuru, that offers online money transfer service to Indians settled abroad.
Koichi Saito, the Founder and Partner of KK Fund, a Singapore-based venture fund with roots in Japan, is bullish on the opportunities that ASEAN offers, with the inflow of Chinese and Japanese capital into the region providing more opportunities for deal flow and exits.
In terms of the KK Fund, can you discuss the funds it currently manages?
We started fund one in early 2015, which has a corpus of a few million dollars, so it was a micro fund. From that fund, we made 13 investments in online marketplaces in the e-commerce space. At the time, we were investing between $50,000 and $200,000. Then we closed a second fund at the end of 2016, a $20-million fund. We’re still focusing on seed-stage startups.
P2P lending platforms are a proven model in the US, China and Japan, as well as in Southeast Asia. However, there is a lack of credit scoring data, so with the need for alternative financing solutions in the region, there are substantial opportunities.
Besides the founders, what do you look for in terms of the business concepts?
Let’s say, in the Philippines, there are a lot of remittances players. Now, I reckon only about 10 per cent of people in the Philippines have a bank account. They need a platform for admittance to a bank. If there is a solution that addresses such an issue not only in the Philippines but across Southeast Asia, then I am impressed.
Egypt-based fintech startup Moneyfellows has raised a $600,000 investment from a group of investors led by Dubai Angel Investors and 500 Startups, the company’s founder Ahmed Wadi revealed.
Moneyfellows is a web and mobile-based platform allowing users to create, manage and track money circles online with members of their social networks. The startup makes money by charging users a small fee when they withdraw their payout from their money circle.
Although rarely recognized by mainstream financial institutions, money circles have long given people who lack access to the formal banking system the ability to save money and take small loans. This type of finance is known by many different names. In Egypt, it’s called gameya while in India, it’s a chit fund. In North America, it would be a rotating credit and savings association, or ROSCA.
To date, Wadi reports Moneyfellows has had 2,600 paying users and about 240 active circles.
So many fintech companies have birthed, including , Startcredits.com, to provide online loan marketplace for entrepreneurs to fund their start-ups, promoting financial inclusion in the bid to fix the access to credit problems. A fintech to watch is Social Lender, a digital lending solution based on social reputation on mobile, online and social media platforms. Social Lender is designed to bridge the gap of immediate fund access for people with limited access to formal credit. Social Lender uses its own proprietary algorithm to perform a social audit of the user on social media, online and other related platforms. Loans are guaranteed by the user’s social profile and network allowing users to then borrow from banks and other financial institutions based on their social reputation.
Flutterwave, a payments platform is making it easier for banks and businesses to process payments across Africa. U.S. investors have invested $10 million into it.
TD Bank just bought its first technology firm, Toronto-based artificial intelligence startup Layer 6.
The Canadian banking giant, also based in Toronto, invested an undisclosed amount in Layer 6 to help it “continue to transform itself” in the industry shift from mobile-first to AI-first customer experiences, said Rizwan Khalfan, TD’s chief digital and payments officer. The transaction was completed Tuesday morning.