Using Machine Learning for Risk Management in Online Lending

online lending

The financial services industry has entered into an arms race fuelled by machine learning and AI. Artificial Intelligence is an umbrella term for computers able to execute on a higher level of human mental functioning. Machine Learning is part of that AI; it allows the computer to learn from its functioning without being explicitly programmed. […]

online lending

The financial services industry has entered into an arms race fuelled by machine learning and AI. Artificial Intelligence is an umbrella term for computers able to execute on a higher level of human mental functioning. Machine Learning is part of that AI; it allows the computer to learn from its functioning without being explicitly programmed. The machines will get better at their jobs without humans needing to code that improvement.

AI has wide-ranging applications across the business spectrum, but nowhere is it being exploited with as much zeal as in FinTech. According to CB Insight reports, more than $5 billion has been raised by AI start-ups globally in 2016. This dwarfs the over $3 billion raised in 2015. CrowdProcess is a young data science startup from Lisbon with a new take on machine learning and transparency.

The Genesis of CrowdProcess

CrowdProcess was founded in 2013 by Pedro Fonseca, Jaoa Menano, and Samuel Hopkins.

Fonseca, head of data science and CEO, started his career in FinTech at the age of 25. He also co-founded ODMLX, one of the largest open data organizations in Lisbon. Menano, co-founder and CFO, has technical expertise in data science and worked with Fidelidade, an insurance company in Portugal as project manager. Hopkins, CTO and co-founder, is proficient in machine-learning. He has worked at three different start-ups performing different roles as an application programmer, system administrator, and applied data scientist.

CrowdProcess’s headquarters are located in Lisbon and New York. The company has raised $1million in seed capital funded by Seed Camp, Rising Ventures, Kima Ventures and Frontline Ventures. It is currently in a new round with 50% of capital already committed by investors.

How CrowdProcess Taps Into AI Innovation

CrowdProcess offers a SaaS analytics and data decisioning model for the credit space. They help develop, deploy, and monitor credit scoring models. Using AI and machine learning, they can reduce default rates by almost 30% or improve acceptance rates by over 10%. Its USP is the ability to operate without black boxes.

A black box is a system where the inner components, or logic, is not available for inspection. Due to its existence in machine learning models, it hinders the process of regulation. Adverse Action regulation requires the lender to inform the borrower that an adverse action has been initiated on their credit application, and why. This provides more transparency throughout the process.

James, its flagship solution, is a one-stop shop for credit risk management. Lenders gain access to James around the clock. To ensure reliability and avoide vulnerabilities, it is fully secure and highly encrypted. James’ cloud infrastructure is scalable, and its potential can be enlarged to accommodate hockey stick growth.

James’ features include:

  • Scorecard: Traditional scorecards have been augmented with a random decision factor, gradient boosting, and neural networks.
  • Validate: It provides precautionary alerts according to the model`s metrics and access to data necessary for validation. James has an edge over other solutions in the market, which may not enable regulators to validate.
  • Deployment: James has superiority with regards to the timeline of deployment. The model can be run automatically or in conjunction with other models. So a 6-month integration time is essentially reduced to zero and the company can compare multiple models in parallel.
  • Monitoring: James monitors its own performance in real-time. The system not gives out early warnings and helps ensure data sets are used appropriately. When a material change occurs, the software is tweaked accordingly.

CrowdProcess charges a fixed fee, but its flexible depending on the volume. The company invests a lot on UI and UX removing the need for hiring coders and engineers. A financial analyst with sound knowledge of credit models will be able to use the model without any external support or requirement to code. This young startup has been able to snap established clients like Evo Banco (owned by Apollo Global Management, a bank in Spain) and Cofidis (a consumer financing house, in Paris).

The Value of Machine Learning

In order to help customers know the real value of its model and smooth out the onboarding process, CrowdProcess has launched a 1-day onboarding workshop known as Jumpstart. Customer data is cross–validated with the company´s predictive analysis. Through this back testing, customers are guided toward the proposed benefits of saving time and money in preference to traditional predictive machine learning models. CrowdProcess has undertaken 15 jumpstarts that have resulted in 100% positive outcomes and has beaten existing models.

James has the ability to outperform incumbent models in this sector. Realizing the potential, CrowdProcess is on an aggressive sales roadshow in the U.S. Its USP is not only the ability to offer a better model, but a solution which is transparent and will not turn out to be a regulatory nightmare for its clients. The Portuguese company has major tailwinds and has the chance to capitalize on this massive market.

Author:

Written by Heena Dhir.

The SaaS Software Solution That Makes Banks More Like FinTechs

online lending

What advantages do FinTechs really have? If they do have advantages, how can they maintain that edge? D&H is a public global payments and lending technology provider serving nearly 8,000 financial institutions, specialty lenders, community banks, credit unions, governments and corporations, including Canada’s largest banks. They are large and cost-effective at the same time. How do they […]

online lending

What advantages do FinTechs really have? If they do have advantages, how can they maintain that edge? D&H is a public global payments and lending technology provider serving nearly 8,000 financial institutions, specialty lenders, community banks, credit unions, governments and corporations, including Canada’s largest banks. They are large and cost-effective at the same time. How do they do it? By focusing on speed and flexibility.

A Unique Offering

While banks and credit unions weren’t early adopters of technology, they have an advantage.

“People don’t want to be online only,” Church-Adams said. “They still like to go in the branch whether it’s Millennials, Boomers, or a generation in between. Banks still have brick and mortar, but if they’re powered by technology and partnering with D&H, then they’re able to catch up because they have the ease of use, the borrower-facing mobile, and a quicker decision-making apparatus. They then support that by building relationships and servicing their customer base. In terms of compliance, they also have that trust.”

D&H’s history in compliance matched with a bank’s history in managing money creates a strong value proposition for a borrower in terms of considering a bank versus an alternative lender.

“Suddenly, the banks are able to catch up,” Church-Adams said.

Touch points vary per business model, but there are sectors and regions where a physical presence makes a particular entity unique.

“But it’s one among many tools,” Zepecki said. “What’s becoming clear is, if you don’t have the digital tools, no one is going to accept the other tools as an alternative. Your ability to innovate and adapt is always going to be an edge.”

D&H provides the tools for quick applications and quick decision-making. Asked which innovations will make a difference in the next few years, Zepecki said, “I think it depends. If you look broadly, the block chain, payments and contracts, and some of the commercial relationships could be quite interesting. Chat bots? I think time will tell. It’s another channel. Does it prove useful or is it preferred, or does it become just one channel of five? Depends how much more intelligence you can put into a chat bot. I think the jury’s out, but it may appeal to a younger audience as an important channel.”

Zepecki said artificial intelligence could lead to more business for a lender if they can make the decision-making process more efficient.

“If your limitation is a knowledgeable person around decision-making and that person can use their knowledge more effectively with automation and you put the right decisions to the right person, you can have fewer rounds of decisioning,” he said. “Then you can do a bigger book of business. Is that a net gain or a net loss? It will probably depend on the situation.”

Church-Adams has seen banks increase their business with technology.

“We’ve seen large credit union clients who with little commercial lending partner with us and adapt our technology,” she said. “They still need the person, but that person is able to grow their commercial business from zero to $1.8 billion in one year because they’re powered by technology. There’s a multiplying factor for the institution.”

How D&H Established Its Credibility

In 1870, D&H began as a Canadian company that manufactured paper checks. As they evolved in the last century, it became obvious the paper check was not the wave of the future. The company pivoted toward technology and acquired a number of businesses specific to the Canadian market: recover & collateral management solutions, student lending, and brokered and networked mortgages.

Ten years ago, they bought some complementary mortgage technology and then bought Harlin Financial to get into core banking. Recently, they bought a payments company called Funtech. Now, they cover lending, payments, and financial solutions.

John Zepecki and Nina Church-Adams head the lending group, a team of 16 people, in a company of over 5,000 employees. Church-Adams is head of product marketing for the global lending solutions group and leads the marketing team across the U.S. and Canada. The whole group is focused on online lending and alternative credits. Zepecki is group head of product management for lending.

Migrating to SAS Cloud and market shares

“I have the responsibility of driving product to move from a mix of tech-enabled services to more of a SAS Cloud product company,” Zepecki said. “If you look at the businesses, there’s lending, which is very much a software business, and SAS with a couple of major product lines in it. There’s also a payment infrastructure with a number of tier-one banks as clients and broadening over a period of time. Then there’s a traditional business built around checks and the financial core, and some Canadian-specific service businesses built around the relationship we have with large banks.”

The lending side of the business makes up about 40% in terms of revenue,Zepecki said. The other 60% is split between the other two big business blocks. Payments is growing much more quickly than the other sides of the business.

“We really truly the only kind of end-to-end thin technology player,” Church-Adams said. “A lot of our competitors just do mortgage or point-of-sale, or they just do loan origination, but we have breadth and depth, which really sets us apart.”

D&H might not be the biggest in terms of revenue, but with 3,000-4,000 customers, it is among the leaders. They also serve consumer, commercial, mortgage, and small business customers through every step of the loan process.

Interesting Views of the Market

Zepecki said the biggest trends in the market include user experience, making the process easier, shortening collaboration times, and making the decision-making process faster and clearer.

“In some cases, people are behind and need to catch up,” he said. “Technology vendors have a big opportunity to let people change their businesses.”

D&H serves three types of customers. Some are leading edge and figure out they can’t handle mobile, chat bots, and other tech devices with their homegrown system. Others sit out the first few innings of the game on the Internet and lose customers. The third customer sits between those two.

“They’re halfway this way or halfway that way and want to get into the future, starting with one thing and expanding over a period of time,” he said. “That’s where we become attractive. We can start where you want to start on your biggest pain point, but over a period of time, we offer solutions that go together.”

If a customer wants to start with POS and then look at an LOS on mortgage, for example, they want to start with one or the other. D&H is happy to do both.

“Vendor regulation is another trend,” Zepecki said. “Vendor risk goes up, so if you have fewer strategic vendors, that’s appealing. If have solutions that are broader, then you’re better as a vendor, more attractive. Lastly, on compliance, whether it goes up or down, there are going to be changes.”

Those changes in the market create cost. Lenders have to hire somebody who knows what to do, and there are a finite number of people available.

“If everyone is trying to do it themselves, it becomes more prohibitive,” Zepecki said, “That’s where I think we can use our domain expertise and long history around compliance. If you can afford it, which is debatable, and can you find skilled people? I think that is becoming harder and harder.”

For institutions that see compliance and management as difficult, the tendency is to want fewer vendors and outsource compliance, so the focus is on customers, driving the business, or changing to a new business model. That trend serves D&H well because they have a decades-long track record in providing document compliance.

“That is difficult to replicate and makes a great foundation to build off of,” Zepecki said.

Author:

Written by Nicki Jacoby.

How Community Banks Must Face the New Lending Reality

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Commercial banks have cheap capital and a large loyal customer base, but their inability to execute loan requests in a hassle-free and time-sensitive manner has led to a customer exodus toward online lenders. Due to marktplace lenders disrupting the lending space, banks are finding it difficult to stop the downward spiral into obsolescence. One software […]

community bank

Commercial banks have cheap capital and a large loyal customer base, but their inability to execute loan requests in a hassle-free and time-sensitive manner has led to a customer exodus toward online lenders.

Due to marktplace lenders disrupting the lending space, banks are finding it difficult to stop the downward spiral into obsolescence. One software company selling online origination platforms to banks, however, may change that.

Alliance Partners, headquartered in Maryland, launched in 2010 to solve this pain point for traditional banks. In 2012, they secured $150 million from BlackRock, John Delaney, Jason Fish, and Blue Mountain Capital Management LLC. Co-founder Fish is also a director of Congressional Bank and co-founder of Capital Source. Co-founder and Non-Executive Chairman of the Board Lee Sachs has served as counselor to the secretary of the treasury and head of the Crisis Response Team.

The idea behind Alliance Partners is to provide banks with the technology, technical personnel, credit risk management system, regulatory expertise, and other strategic resources for the purpose of better managing bank portfolio strategies.

There are approximately 2,000 mid-size banks with asset holdings between $200 million to $10 Billion. They all share a common challenge, have access to low-cost capital, have established customer relationships based on trust, and maintain robust real estate portfolios. However, their weakness is in dealing with process-intensive funding requirements like C&I and SME lending. Twenty-five years ago, for instance, banks with fewer than $10 billion in assets had approximately 80 percent consumer loan share. Today, it’s more like 7 percent. The huge drop is due to lack of expertise and the personnel required to run a loan department with a comprehensive bouquet of services.

Alliance Partners have a pay-as-you-go business model with no upfront fees. This helps attract community banks that would like to try their services.

BancAlliance Network is a shared lending platform for community banks with more than 200 members in 39 states. Alliance Partners is its asset manager. From loan origination and client handling, Alliance Partners does it all. They’ve also partnered with Personal Capital, Fundation, and Lending Club for some services.

Through Personal Capital, BancAlliance network members are able to offer customers access to a suite of personal finance tools and digital wealth management services. This partnership helps broaden the scope of products and services currently offered by banks and provides sophisticated tools to help customers understand, grow, and manage their net worth.

Lending Club offers members co-branded personal loans. They also purchase certain types of loans. This partnership helps community banks and their customers obtain low capital and operational costs, which lowers the cost of credit for consumers.

Fundation is a leading online business lender. Its partnership with Alliance Partners helps community banks enhance small business lending capabilities with more options and simplicity. They’ve launched an online portal to help small businesses find products that best meet their banking needs.

Alliance Partners have been compared with platforms like LendKey, Cloud Lending Solutions, and Mirador.

Lendkey provides cloud-based technology that enables community financial institutions to deliver loans directly to customers at cheaper rates. There are plenty of companies like CloudLending and Mirador in the market that provide software and SaaS solutions, but today’s banks need more than just software; they need product expertise and a way to market their products to customers. Alliance Partners fills this void.

The community banking market is becoming more customer-oriented as banks struggle to find a digital-first strategy that meets the needs of their customers. It will take more than software, however, to make this pivot. There needs to be a shift in corporate culture. Only technology and a re-alignment with the new lending reality can make this happen for community banks.

Authors:

Allen Taylor
Lauren Twardy