As digital lending continues to grow in size, companies are looking for ways to make their services more efficient and profitable to both lenders and borrowers. And they believe artificial intelligence and big data hold the key to the future of loans. Lenders traditionally make decisions based on a loan applicant's credit score, a three-digit number obtained from credit bureaus such as Experian and Equifax. Credit scores are calculated from data such as payment history, credit history length and credit line amounts. They're used to determine how likely applicants are to repay their debts and to calculate the interest rate of loans.
Digital lenders are pulling in all kinds of data, like purchases, SAT scores and public records. Digital lenders are pulling in all kinds of data, like purchases, SAT scores and public records. The terms of the next loan you get might depend less on your credit score and more on what a computer program thinks of your habits. Digital lending is expected to double in size over the next three years, reaching nearly 10 percent of all loans in the U.S. and Europe. There are now some 2,000 digital startups, many of which are using artificial intelligence to analyze the troves of data created every day.
There's a catch-22 at the core of the U.S. financial system: To get credit, you need to already have established a credit history. Millions of Americans never find a way around the contradiction, and as a result, are locked out of things like credit cards or student loans that the rest of the population can take for granted.
The fintech industry is highly competitive, and it's important to have a moat around your business and/or your technology to carve your own niche. Upstart used proprietary machine learning and AI algorithms to develop its platform and ensure that it remains ahead of the pack. Though the AI technology disruption is at the nascent stage, Upstart founders believe it won't be long when this technology will take over the entire lending ecosystem. The notion of using machine learning and artificial intelligence is to revamp how credit works fundamentally and not just as an assisting tech for online lending, fraud detection, and automation. The average credit card interest rate is 18.76 percent and $1,292 is paid by a household as credit card interest each year.
Just about everyone knows artificial intelligence (AI) is taking hold in many parts of our lives. What most people are referring to when they say AI is actually machine learning (ML) -- the use of algorithms to mimic the way humans take in information and gradually learn to make more-accurate predictions. Some companies are doing it better than others. Three that are doing it well are trading at attractive valuations right now. Upstart ( UPST -2.06%), Microsoft ( MSFT 0.62%), and JPMorgan Chase ( JPM -0.30%) are all market leaders investing heavily in AI innovation.