The loan industry is one of the oldest in the world. Lending was one of the forerunners of modern economics. The idea of turning lending into a business was part of the foundation of banking. However, that does not mean lending today looks anything like it did hundreds of years ago. Nor should it.
In fact, lending should be evolving as quickly as any other financial service. And, while banks have largely stuck to old products and processes, many innovative private lenders are using technology to improve. Learn how Figure uses technology for a start. By taking everything online, they have made borrowing quick and easy, facilitating financial solutions for those in need.
Figure is not the only company using technology to disrupt the industry. There are a number of ways in which technology is changing how we lend and borrow money.
Peer-to-Peer (P2P) Lending
One modern form of lending that has become popular is peer-to-peer (P2P) lending. P2P lending is based on the concept of individuals making money from lending while providing better terms than private lenders can. P2P platforms have been set up which connect lenders and borrowers.
The platforms work almost like Uber or Airbnb might. Both borrower and lender need to provide information that backs up their reliability. They give each other ratings based on their experiences, whether good or bad. Lenders can report bad borrowers and vice versa.
P2P lending is far from perfect, but it has become a useful platform for many people in need of loans. It has also become a good way of making some extra income for people who lend their savings as a form of investment.
Lenders have been using credit scores to approve or deny loans, as well as set loan terms and rates, for way too long. The problem with credit scores is that they are overly-punitive and often not representative of future behaviour. The reality is that bad borrower behaviour is often circumstantial. A loan you failed to pay back when you were struggling to pay rent while working a low-wage job as you studied says nothing about you as a fully-qualified professional in a stable job.
This is where AI-based lending comes in. AI is used by companies like Upstart and SoFi to determine whether borrowers are likely to pay back loans or not. They use data that is predictive rather than descriptive of past behaviour. This includes education and employment.
AI-based lending helps determine which loans will benefit which borrowers, which helps the lender in the long run as well. It is a vast improvement on a system which previously punished people for circumstances while greenlighting people who were in no position to pay back new loans.
Technology is changing lending for the good. As with most financial services, traditional banks are slow in adopting modern technology and the disruptive startups are the big benefactors of this. Over the next few years, as AI and machine-learning improve qualitatively, we will see financial services like lending becoming all the more advanced.