Bottom Line: AI & machine learning will improve Fintech in 2020 by increasing the accuracy and personalization of payment, lending, and insurance services while also helping to discover new borrower pools.
Zest.ai’s 2020 Predictions For AI In Credit And Lending captures the gradual improvements I’ve also been seeing across Fintech, especially at the tech stack level. Fintech startups, enterprise software providers, and the investors backing them believe cloud-based payments, lending, and insurance apps are must-haves to drive future growth. Combined with Internet & public cloud infrastructure and mobile apps, Fintech is evolving into a fourth platform that provides embedded financial services to any business needing to subscribe to them, as Matt Harris of Bain Capital Ventures writes in Fintech: The Fourth Platform – Part Two. Embedded Fintech has the potential to deliver $3.6 trillion in market value, according to Bain’s estimates, surpassing the $3 trillion in value created by cloud and mobile platforms. Accenture’s recent survey of C-suite executives’ adoption and plans found that 84% of all executives believe they won’t achieve their growth objectives unless they scale AI, and 75% believe they risk going out of business in 5 years if they don’t. The need to improve payment, lending and insurance combined with customers’ mercurial preferences for how they use financial services are challenges that AI and machine learning (ML) are solving today.
How AI & Machine Learning Will Improve Fintech In 2020
Fintech’s traditional tech stacks weren’t designed to anticipate and act quickly on real-time market indicators and data; they are optimized for transaction speed and scale. What’s needed is a new tech stack that can flex and adapt to changing market and customer requirements in real-time. AI & machine learning are proving to be very effective at interpreting and recommending actions based on real-time data streams. They’re also improving customer experiences and reducing risk, two additional factors motivating lenders to upgrade their traditional tech stacks with proven new technologies.
The following are ten predictions of how AI will improve FinTech in 2020, thank you Zest.ai for your insights and sharing your team’s expertise on these:
- Zest predicts lenders will increase the use of ML as the way to grow into the no-file/thin-file segments, especially rising Gen Zers with little to no credit history. Traditional tech stacks make it difficult to find and grow new borrower pools. Utah-based auto lenderPrestige Financial Services chose to rely on an AI solution instead. The chose Zest AI to find and cultivate a borrower pool of people in the 19-35 age group. Using an AI-based loan approval workflow, Prestige was able to increase loan approval rates by 25%, and for people under 20 by threefold.
- Mortgage lenders’ adoption of AI for finding qualified first-time homeowners is going to increase as more realize Gen Z (23 – 36-year-olds) are the most motivated of all to purchase a home. In 2020, long-standing assumptions about first-time homebuyers and their motivations are going to change. A recent story in HousingWire, “This generation is the most willing to do whatever it takes to buy a home,” explains that Gen Z, or those people born between 1996 and 2010, are the most likely to relocate to purchase a new home. A recent TransUnion market analysis found 70% of Gen Z prospective home buyers are willing to relocate to buy their first home, leading all active generations. 65% of Gen Xers, or those born between 1965 to 1980, were the second most likely to move. AI and ML can help lenders more precisely target potential Gen Z first-time homebuyers, measuring the impact of their marketing campaigns on attracting new borrowers. The TransUnion market analysis finds that 58% of respondents are delaying a home purchase due to anticipated high down payments or monthly payments. 51% said the need to obtain a 10% to 20% down payment was stopping them. According to Joe Mellman, TransUnion senior vice president, and mortgage business leader, “Many of our potential first-time homebuyer respondents don’t seem to be aware of the wide variety of financing options available to them.” The TransUnion market analysis found that many of the potential first-time homeowner respondents have never heard of low down-payment options from Fannie Mae, Freddie Mac, or of the Federal Housing Administration.
- Zest predicts banks and other financial institutions will strengthen their business cases for AI pilots and production-level deployments by recognizing the operating expense (OPEX) savings of ML. Several recurring costs involved in developing, validating and deploying credit risk models can be reduced or cut by switching to machine learning, according to Zest. Lenders can get the most out of their data acquisition spending by using modern ML tools to assess which data sources yield the most predictive power for a model. Lenders will also switch to ML to simplify their IT and risk operations by consolidating into fewer models that can do the work of what used to be multiple individual linear models for every customer segment.
- Compliance cost growth will decline even faster due to ML. Financial institutions that have AI/ML algorithms in production log every change in a model and can produce all the required model risk governance documents in minutes instead of a compliance team manually taking weeks to do it. Automated tools also shrink the time it takes to do fair lending testing by building less discriminatory models on the fly rather than the time-intensive approach of drop-one-variable-and-test. Time is money, especially in lending.
- AI and ML will gain critical mass in collections, providing insights into which approach is the most effective for a given customer. Zest has built collections models for a few financial services firms and has found them to be very effective. Collections logic, predicting which customers to wait on when bills are past due, is a strong fit for machine learning. With one bank, Zest found that ML models can, for example, accurately target the borrowers most likely to make a certain minimum payment based on the value of their loan within 60 days of falling behind their due date. In three months, Zest built two models from traditional credit bureaus and the bank’s proprietary collections metrics to predict this repayment propensity of borrowers. One insight into the data was that borrower behavior accounted for just over half of the bank’s ability to collect missed payments, but operations played a significant role.
- If there’s a downturn, ML will get blamed (even though it can actually help in a downturn). Pankaj Kulshreshtha, CEO of Scienaptics, originally made this observation at the Money 20/20 Conference held earlier this year. Models built only in good times can see their correlations break when times go bad. Lenders who observe best practices in AI and ML adoption will make sure to stress-test their models, perhaps by including synthetic data to add heterogeneity. Better ML monitoring will be important, too. “ML models and algorithmic monitors can do a better job seeing around corners, spotting rising numbers of inbound outlier applicants that signal more volatile conditions ahead,” says Seth Silverstein, Executive Vice President of Credit Risk Analytics for Zest AI. An effective ML monitoring tool should excel at spotting outlier applicants and feature drift, ensuring more accurate model outcomes.
- 2020 is going to be a break-out year for partnerships and co-opetition as payments, lending and insurance firms vie for a growth position in embedded financial services. Matt Harris of Bain Capital Ventures’ prediction of embedded fintech suggests a proliferation of cloud-based Fintech apps around the core: payments, lending, insurance. That creates an ideal situation for AI-related alliances and partnerships among the incumbent lenders, startups, data aggregators and the CRAs. To Harris, the layers of the stack are centered around connectivity, intelligence, and ubiquity. According to Crunchbase, there have been 51 Fintech acquisitions in 2019 alone. Plaid’s acquisition of Quovo in January for approximately $200 million and Fiserv’s acquisition of First Data reflect how Fintechs are creating their own unique tech stacks already.
- Zest predicts Fintechs will seek out AI and ML modeling expertise more so than build expertise and teams on their own, which will be costlier and take longer. Embedded Fintech’s future adoption rate is predicated on how effective development efforts are today at minimizing incidental bias and providing customers with greater visibility into how and why models provide specific results “Some of these startups are bringing their own data science and ML models. We have to hope these firms own, build, or buy the tools to ensure their models are inclusive, free of incidental bias, and use transparent AI customers can trust. We see explainable AI as being an essential feature or service in that tech stack,” says Zest’s Silverstein.
- Fintechs will rely on AI and ML to help close the talent gap each of them has today while also improving the effectiveness of their talent management strategies. Finding, recruiting, and hiring the best candidates for development, engineering, marketing, sales, and senior management roles is an area Fintechs will increasingly adopt AI and ML for in 2020. Fintech CEOs and CHROs will begin upskilling programs for themselves and their teams to increase AI fluency and skills mastery in 2020. According to a recent Harris Interactive survey completed in collaboration with Eightfold titled Talent Intelligence And Management Report 2019-2020, 73% of U.S. CEOs and CHROs plan to use more AI in the next three years to improve talent management.
- Credit unions will adopt ML in 2020 to automate routine tasks and free up human underwriters to focus on providing more personalized services, including improvements in inquiry resolution & dispute and fraud management. Credit unions are built on an annuity-based business model that delivers successively higher profitability the longer a member is retained. Credit unions will capitalize on ML by driving up loan approvals with no added risk and automating more of the loan approval process. By the end of 2020, according to a Fannie Mae survey of mortgage lenders, 71% of credit unions plan to investigate, test, or fully implement AI/ML solutions – up from just 40% in 2018. AI and ML will also be adopted across credit unions to improve inquiry resolution & dispute and fraud management while improving multichannel customer experiences. Providing real-time, relevant responses to customers to expedite inquiries and dispute resolutions using AI and ML is going to become commonplace in 2020. AI and ML are predicted to make a significant contribution to automating anomaly detection and borrower default risk assessment as the graphic below from Fannie Mae’s Mortgage Lender Sentiment Survey® How Will Artificial Intelligence Shape Mortgage Lending? Q3 2018 Topic Analysis illustrates: