Automated lending is a hot topic in coverage of financial innovation, one that has both provoked criticism and fostered misconceptions. The dominant criticism is that widespread automated lending would drag down lending standards. From this flows the idea that there is a blind drive towards automated lending by over-excited tech companies, which as far as the UK is concerned isn’t the case.
The use of tech to automate the lending process is perhaps most relevant today in the context of business and consumer loans. Kabbage, Lending Club and On Deck are the most commonly cited examples of lenders in the US that use automated algorithms to lend to business and individuals.
Their use of algorithms enables them to manage their risk appetite, which tend to be much greater than that of the banks. Data points from a customer’s use of Facebook, to their use of capital letters are factored into the decisions the algorithms produce.
Continuation vs turning point
By and large, the move towards tech-enhanced lending is a push for continued progress rather than a turning point in the recent history of banking. Banks have been using algorithms to lend since at least the 1990s, including automated underwriting in consumer credit card lending. In the context of property lending today, automation can include tools from automated fraud detection to digital application processes. This kind of tech allows forward-thinking lenders to improve their service, speed and cut costs for themselves and brokers alike.
The lending process is a headache for borrowers, brokers and lenders alike when it doesn’t run smoothly. So most will appreciate that lending and underwriting products could be augmented by Artificial Intelligence technologies, sequences of instructions that tell computers what to do and allow them to process data and make decisions faster, better and easier than humans alone.
Future-thinking with integrity
Automated lending won’t happen over overnight. The movement towards technology-enabled lending is instead a process that will take many years. But in that time, the smartest lenders will be looking forward whilst maintaining rigorous standards of underwriting and due diligence.
The dangers of automated lending are well-reported. Countrywide Financial Corp collapsed after using automated loan underwriting technology before the financial crisis. Bank of America – which bought Countrywide in 2008 – paid a fine of almost $1.3 billion because of defective loans Countrywide made using a mostly automated process.
So the movement among specialist and challenger lenders is not about automating lending, but about learning the tech that will help them offer a great service. As LendInvest CEO, Christian Faes puts it, “we’re a lender learning the tech not the other way around”: the integrity of the lending comes first.
Despite the hype of intelligent machines, the first applications of tech, artificial intelligence and automation in the property market aren’t replacing humans and human intelligence but augmenting them.
So what’s LendInvest’s stance on the relationship between tech and lending?
Our mission is to disrupt old-school property lending with technology that makes it simpler and faster for our brokers and their customers.
This shapes our approach as a lender: robust underwriting, good old-fashioned common sense and our evolving technology enables us to be quick, flexible and responsible.
So to bust the myth: there’s no movement of tech-crazed companies shaking up the lending world with automation. But there is a gradual process of change, whereby lenders are using developments in technology to improve their services. With our sights set on the future, we’re sticking at the vanguard.