Alt Lending: Credit Decisions in a digital world


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Last week I more or less wrote off Jerome Powell’s comments on allowing the US economy to run hot without response as nothing new. Many of the mainstream press commentators saw it as a major change in US policy. If that is the case what is the likely impact going to be? To me at this point it just seems like an indicator that nothing is going to change interest rate wise for a long time and will not lead to inflation taking off. We will all have to wait and see.

Start up bank makes US push after £ 750m Virus loans

Why this matters: Interesting story about yet another go for growth digital bank that wants to crack the enigmatic  SME market in the US and the UK. The interesting thing about this particular contender however is the fact that it has developed a “Credit Science” application that it is actively licensing to other banks to help them enter the digital market. The application appears to be a combination of three factors. Firstly historical data obtained from a variety of external public sources which is then stored within its Database. Secondly “Data Science” which appears to be use of KPI norms and positioning within the borrowers industry and lastly traditional Credit analysis techniques which can interact with the data from the other two disciplines. It’s an interesting concept and presumably has an infinite number of business, personal and other  variables that can be weighted and tweaked to cope with any number of specific factors. My old boss at BofA, Jim McDermott once told me that credit is an art not a science and he was probably right but the more data you have at your disposal the more likely you are to gain insight and to make better lending decisions. However the key to whether or not you are going to get your money back is less reliant on the past than it is on the future. OakNorth bank seem to understand this by emphasising the necessity of interacting in depth with the borrowers executives before making its lending decisions. The bank also states that there has been no real change in the way the way that lending occurs since the 1980. An old cynic like me can both agree and disagree with this. Oak North is still a small organisation,has not been through a full business cycle yet and like all of us has not encountered the aftermath of a pandemic. Nevertheless the direction of travel, as far as data management is concerned, is probably inevitable.

Amigo squeezed as borrowers take pandemic payment breaks

Why this matters: The unseemly squabbling among the board members of Amigo is yet another demonstration of how quickly things can change in uncertain times. Of course this has nothing whatsoever to do with technology but everything to do with human beings.  The historic data, an essential part of Credit Science technology has thanks to COVID,  something entirely beyond its control had a dreadful impact on Amigo’s business. I cannot help but think, however, that a business like Amigo which totally relies on third party support should have at least considered that a pandemic might create an existential threat and taken some amelioration measures. I know that at the beginning of this year the threat of a pandemic was thought unlikely but it begs the question. If there is a pandemic or other existential risk have the circumstances been fully thought through.  Psychologically acting as a guarantor is not the same as being a principal and indeed creates an arguably distanced and more complex risk in a crisis. It is just another of the many thousands of variables encountered in human behaviour wherever money is concerned.

SEC eyes probe Robinhood handling of March shutdown

Why this matters: While strictly not in the digital lending space there is a warning here for start up banking operations that the robustness of their end to end digital platforms are being very seriously looked at by various authorities in this case the SEC. The Robinhood platform is an equities trading platform and is frequented to a disproportionate degree by young inexperienced traders. Outage of their platforms during the helter skelter of the early days of the pandemic meant that some punters were all dressed up with nowhere to go when the platform went down and were not too happy about it. Some digital start ups might well be in the same boat particularly where they are offering trading services where positions might well be open but where the user has no alternative way to close them. It might be as well that new clients are warned that it takes a lot of time to set up a banking relationship these days and that users are compelled to have a plan B.

Howard Tolman is a well-known banker, technologist and entrepreneur in London,

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For context on Alt Lending please read the Interview with Howard Tolman about the future of Alt Lending and read articles tagged Alt Lending in our archives.

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