Here’s how AI is changing the money lending landscape

Getting a loan from conventional lenders is difficult. It requires a lot of paperwork and weeks – if not months – of waiting to hear back about an application.

These lenders also rely on traditional credit-scoring measures such as reports and factors, like the 5Cs of credit, to determine loan eligibility.

While it’s easy to get an accurate credit score in developed countries, that’s not the case in developing markets such as India and Indonesia, where a large portion of the population remain unbanked and are thus ineligible for loans from banks and legal moneylenders. As such, people often turn to unlicensed lenders and end up trapped in debt.

This is where AI comes in. With its ability to parse and analyze large volumes of data, it’s transforming how the lending industry works.

AI for alternative credit scoring

Dmitry Voronenko, CEO and co-founder of AI-powered lending software provider Turnkey Lender, says that artificial intelligence opens up the possibility of using different metrics to assess a borrower’s credit score.

For instance, looking at the data of an individual’s mobile phone reveals when they pay their bills and the types of goods and services they pay for, as well as indicates whether they’re constantly moving locations – factors that can determine their creditworthiness.

Dmitry Voronenko, CEO of Turnkey Lender / Photo credit: Turnkey Lender

Someone who uses an expense tracking app regularly is also more likely to be financially savvy, and thus be more able to pay back a loan.

Even how long a person spends filling out a loan application on a website can be an indicator of their financial capability.

“[The number of] times the borrower selects and changes the loan amount and the loan duration [when filling in the form] says a lot about their current situation,” explains Voronenko. “If you change it six times in three minutes, something’s up.”

The same logic applies to businesses as well, especially smaller enterprises that can’t meet traditional scoring methods, making them immediately ineligible to receive loans from banks. Other indicators, such as the frequency and size of their transactions, can paint a clearer picture of their creditworthiness.

Turnkey Lender aggregates these disparate pieces of information and analyzes them, giving lenders a better understanding of how likely borrowers can pay back their debts.

The platform also cuts down the time and manpower required for lenders to process applications and issue loans, and their reduced operating costs help drive interest rates down.

Lending during a pandemic

The Covid-19 pandemic has driven home the importance of AI and how it can change the lending industry.

Businesses and individuals that, mere months ago, were in great financial shape are now scrambling to stay afloat by applying for loans. But because of the crisis, credit bureaus have decreased access to accurate data regarding their financial status.

So while the demand for loans is on the rise , lenders are getting more cautious about borrowers who will default on their obligations.

Photo credit: Aekkarak Thongjiew / 123RF

Using bank account statements or e-wallet payment data, such as payment frequency, makes determining credit scores more accurate. AI can look at this information in real time, unlike traditional credit bureaus that often take several months to do so.

With alternative credit-scoring measures, lenders can better evaluate potential clients as well.

Companies, for instance, are exploring in-house lending options to provide loans or other forms of assistance to partners who are in financial distress. An example is offering buy-now, pay-later short-term financing alternatives that can increase revenue and keep clients loyal during these difficult times.

“There is this trend where non-lenders, who never dreamed of being lenders, are starting to offer financial services,” says Voronenko.

These companies often have valuable alternative data about their clients, such as usage patterns, preferences, and buying habits, which enable them to better evaluate their creditworthiness.

AI enables these companies to extract this information and promptly determine whom to finance and what amount to offer them to automate the in-house lending process.

The future of lending

The impact of AI is immense, going as far as changing the way people in the industry communicate with borrowers, says Voronenko.

Using the technology, lenders can find out what kind of tone and messaging are most suitable for a specific debtor, which is handy information, as using the right approach when contacting a customer can increase the likelihood of loans getting repaid on time.

Ultimately, Voronenko believes that beyond Covid-19, AI will open digital lending to a bigger variety of businesses, allowing lending to be embedded into different industries.

“It will be like cinemas and Netflix,” he explains. “Banks will be [like] cinemas, where you go to for bigger, complex loans. But the majority of loans can be provided by smaller companies, making [lending] more accessible.”

Turnkey Lender is a provider of AI-powered lending software that evaluates borrowers, supports decision-making, and automates the online lending process.

Find out more about Turnkey Lender on its website.