How FinTechs Utilize Advanced Data Science to Improve Credit Decisions in Uncertain Times

Lenders are becoming smarter about who they lend to. Lenders are using alternative data and advanced analytics to lend faster and smarter. Most lenders are not seeking to take on more risk during a period of economic uncertainty. But, using innovations in data science, lenders can know which borrowers are more likely to pay back their loans.  

We hosted a panel at the Fintech Nexus conference in New York City: "Data Science Innovations for More Inclusive and Responsible Financial Services.” The panel discussed how data science can help FinTechs be more inclusive and responsible in their lending practices. This is a critical issue during tight economic conditions. Luckily, fintech companies have the power to offer financial services to many people who don’t have access to traditional banks.

The panelists included:

•  Harald Schneider, Chief Data & Analytics Officer at Equifax

•  Sudheer Chava, Alton M. Costley Chair Professor of Finance and Financial Services Innovation Lab Director at Georgia Tech

• Laura Kornhauser, CEO and Co-founder at Stratyfy

• Nat Hoopes, VP - Head of Public Policy & Regulatory Affairs at Upstart, and Founding Executive Director of the American Fintech Council 

• and Kabir Kumar, Partner and Founding Team at Flourish Ventures.

A Pretty Extraordinary Moment

Kabir Kumar began by noting that we are living through a "pretty extraordinary moment" when it comes to generative AI. “Data analytics and data science have already been a big part of the financial system for a while and machine learning has helped more people gain access to credit.”

Laura Kornhauser said that lenders need to use more advanced tools to measure credit risk. "We're seeing lenders focus on sound risk management practices and visibility into how existing portfolios are performing. There is a real opportunity for lenders that are able to deploy more advanced tools to measure the underlying true risk of borrowers."

Nat Hoopes talked about his company's AI-powered lending platform and how it can help more people get loans. He believes that the economy is getting better, with people saving more money and having better credit scores. Upstart's new macro index can help borrowers understand their risk level and make better decisions about whether to take out a loan.

Sudheer Chava believes that fintech lenders are in a good position to take advantage of the current banking turmoil. He says that regional and mid-size banks may cut back on lending due to concerns about their deposit base and commercial real estate portfolios. This creates opportunities for fintech lenders who offer loans with high returns and short durations. Chava also believes that fintech lenders need to continue to innovate and develop precision tools to meet the needs of banks and their customers.

New Data Breathes New Life

Harald Schneider spoke about new data sources for credit assessment. Expanding credit files to include additional financial lending instruments, utility payments, payments data, and income and employment data can help lenders make more informed decisions and approve loans for more people. Schneider said, "We're continuously looking at new data sources to expand credit files and include additional financial lending instruments. We're also working with utility companies, payment processors, and employers to collect more data about consumers' income and employment. This data can help lenders make more informed decisions and provide more inclusive lending." 

In addition, Schneider said that affordability is a key component of responsible and inclusive lending, and that Equifax is committed to helping its clients use income and employment data more effectively and comprehensively.

According to Schneider, using new data sources, Equifax customers can approve up to 20% more consumers for lending products without increasing risk, meaning more people can get the credit they need. In addition, using these new sources, 15% of consumers can move from subprime to near-prime or prime offers, which gives them access to better pricing and products.

Driving Policy and Compliance

Sudheer Chava discussed his research with Equifax on responsible sustainable finance. He says that the policies on student loans during the pandemic has led to a 12% increase in credit card debt and more auto loans for borrowers, and that this could lead to defaults in the future. He says that his research can help policymakers understand these issues.

Chava said, "A temporary policy change might in fact, if you don't address the underlying issue, cause issues in the future for the very borrowers that the policy is supposed to help."

Nat Hoopes discussed the 1033 data access rule and the 1071 small business reporting rule. He says that Upstart is constantly testing and that companies should be doing comprehensive testing on their whole platform.

Overall, these new data science tools are making the financial industry better. These tools like alternative data and advanced analytics are making it more inclusive and responsible. By leveraging data to better understand customers and their needs, financial institutions can offer more tailored products and services, improve risk assessment, and reduce fraud. 

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