The ready availability of large volumes of internal, external and social media data, along with advances in analytics and the advent of machine learning (ML), appear to have created the perfect opportunity for improving consumer lending decisions. Can it make the processes that financial institutions use to ensure they are meeting both the stringent regulatory requirements and the ever-changing consumer demands more efficient, while reducing credit risk? These questions were among the topics discussed during a recent webinar conducted by Protiviti's advanced analytics practice leaders and attended by more than 200 people. During the webinar session, we asked the attendees to weigh in on whether machine learning is currently used in their consumer lending business. Just 10.9 percent said yes, while half indicated they did not know whether their organization is using machine learning.
It was an ideal time for online lenders to arrive in Silicon Valley. After the financial crisis of 2008, banks who were the first choice as lenders for everyday people took a little bit of time to comprehend the way in which customers wanted to access credit and they were not ready to take any kind of risks. They failed to focus on the needs and demands of customers and instead they concentrated on capital constraints and other regulations that were proving to be a challenge for them. All these reasons contributed to the emergence of online lenders in the market. Getting a lot of customers appears to be a comparatively easy task.
How will online lending companies weather a full economic cycle? Technology has reshaped the lending industry over the last decade. Companies like Lending Club, Prosper and SoFi built billion dollar business (even if valuations have come down from their respective peaks) by better connecting lenders to borrowers and streamlining what was previously a slow and bloated consumer lending process. Dozens more companies have launched in their wake and are contributing to this wave of change. In fact, TransUnion data shows that fintech lenders now account for over a third of personal loan origination by volume.