Risk assessment is one of the core activities in the financial services and credit industry. In the fintech era, it is changing profoundly and banks are also looking for new technological solutions that increase the effectiveness and efficiency of scoring: more accurate results in a faster timeframe. Traditional banks, especially since the advent of a pandemic, are changing their business by evolving towards a model that can be defined as “banking as a service“. There is also increasing talk of “lending as a service” in the provision of loans to businesses and SMEs.
Digitization of loan disbursement makes it possible to reduce waiting times, improve the customer experience and optimize costs. Following the pandemic period of the last year, economic and financial measures have been implemented to sustain the real economy. These measures also include credit incentives for companies whose budgets have been severely affected by the health emergency.
In the current climate of uncertainty, in which there are continuous variations in demand and the main success factor has been the rapidity of response, banks appear to have a limited vision of the client’s situation. Classic systems for assessing and granting credit often lead to incorrect assessments. These risk assessment systems, in the majority of traditional credit institutions, are based on a limited number of variables (on average between 10 and 20), but in a climate made even more uncertain by the pandemic situation, using such a limited amount of information is insufficient to obtain a correct assessment of the client’s profile.
In addition, in cases that are difficult to assess, choices are often left to human discretion, resorting to a system of exceptions management devised by many of the banks. It is precisely this discretion, combined with a limited decision-making model concerning a large number of different types of data that each bank collects on its customers, that generates an inefficiency that could be overcome by using AI-based methodologies and data objectivity.
New companies entering the credit market using technologies such as artificial intelligence, blockchain and cloud computing, to make a clean break from the past have embraced the idea of the “310” process, which is divided into three steps:
- 3: maximum three minutes for filling out the loan application form
- 1: maximum one second between approval and transfer of funds
- 0: no manual intervention, eliminating subjective evaluations
In 2021, customers are less and less willing to go to the branch, fill out forms and wait several days for a response when they could do everything online and receive the outcome in 24-48 hours. Moreover, companies that use artificial intelligence and offer a fully digital customer journey, as seen above, can afford to offer lower interest rates, becoming attractive to a large part of the market. Several studies have shown that price is still one of the factors most taken into account when choosing a lender.
Thanks to the automated management of the process, fintech has lower operating and management costs that allow them to cover expenses at a lower rate.
A fully digital, data-driven approach can bring different benefits:
- Risk reduction: automating choices and reducing human discretion minimizes operational risks; moreover, by being able to simultaneously evaluate a higher number of variables, more accurate valuation models can be built.
- Operational cost savings: simplifying certain steps in the loan origination process allows a higher volume of loans to be processed without incurring additional costs.
- Increased compliance: with a greater degree of predictability and repeatability in the origination process, the risk of making biased choices is reduced and there is the certainty that you will always remain compliant with regulations, both internal and external.
- Access to new customers: in less than five years, Millennial and Gen Z consumers will hold the largest share of available wealth, but at the same time, they will be one of the most indebted generations. And these will be precisely the target consumers for lenders.
- Improve consumer experience: A better experience, through a streamlined, fast and certain process, leads to increased customer retention.
Digitization and automation of lending processes can therefore help institutions gain new market share and increase customer retention.