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Innovations and Payment Systems

Digital transformation is poised to make credit underwriting easier and faster

And it might also make the entire process more ‘holistic’

Summary

In this digital age, new technologies will make credit underwriting a breeze. Learn how digital transformation could work in your favor when you’re trying to get approved for credit.

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Technology and digital services have been gradually ingraining themselves into more aspects of our lives, and the financial sector is no exception.

In fact, it has been significantly impacted by digital innovation.

With new technology comes new services, which means that old ones are disrupted.

And as customers gravitate toward digital products and services, providers must keep up.

So, how will the digital revolution affect the process that lenders use to decide if an applicant is creditworthy enough to receive a card?

We asked the experts to weigh in with their opinions about that question, and here’s what they said.

Machine learning might enable underwriters to customize card features

Priyanka Prakash is a lending and credit expert at Fundera, a New York-based website dedicated to funding small businesses.

She said machine learning is one area in which digital transformation will undoubtedly affect credit card underwriting.

Machine learning is an application of artificial intelligence (AI) — typically on computer systems — which is a fabrication of humanlike intelligence that can learn, reason, plan, perceive or process natural language.

Machine learning enables computer systems to automatically learn and improve from experience without being specifically programmed — in other words, it focuses on the development of software that can actually access data and use it to “learn for itself.”

Right now, credit card companies offer a uniform set of features and amenities for each card; for example, every consumer who applies for and receives a specific credit card earns cash back and rewards in the same categories, Prakash said.

“In the future, I think card issuers will be able to better track and understand consumer card spending behavior and offer custom features in response,” she added.

For instance, if an issuer sees that a consumer spends a lot of money on dining out, it can offer special cash back and other incentives for restaurant purchases.

And issuers can also make credit limits more fluid by tracking spending amounts and payment history, she noted.

“Machine learning models will blur the lines between different card issuers and products, and it will come down to which companies can understand their customers best,” Prakash said.

See related:  Chatbots will help you with your cards, banking

Digital transformation could make underwriting more holistic

Another way Prakash thought digital transformation will affect credit card underwriting is by making it more holistic.

And she said we’re already seeing this happen with new credit score models.

Previously, someone who had a thin credit file because they were young or new to the country, for example, couldn’t qualify for a credit card (with the exception, perhaps, of a secured credit card).

However, newer credit score models take borrowers’ alternative data into account. This data might include such things as payment history on cellphone bills and utility bills.

“Whether it’s by rolling out Experian Boost, UltraFICO or something less common, lenders are exploring new ways to measure creditworthiness,” said Ted Rossman, industry expert for CreditCards.com.

“Technology is a big part of these risk assessments, and I think some of these ideas are better than others,” he added.

For instance, Rossman said he liked how Experian Boost rewards people for their positive cellphone and utility payment histories.

These on-time payments demonstrate responsibility just like monthly credit card and car loan payments, but unlike credit cards and car loans, cellphone and utility payments have not traditionally counted toward your credit score, Rossman pointed out.

Underwriters who use alternative credit can help consumers with thin credit files build their credit scores and qualify for credit cards, Prakash said.

“In the future, I think it will become routine for credit bureaus to track ‘nontraditional’ data to get a more holistic view of consumers and market their products to a wider set of consumers,” she said.

But Rossman isn’t as confident when it comes to other types of alternative data, such as rewarding people who shop at discount stores, cook at home more frequently and have well-organized phone contact lists.

“Underwriters are experimenting with all of these data sources and each seems to have some correlation with creditworthiness, but I’m not totally buying it,” Rossman said.

“It reminds me of that Psych 101 example that murders and ice cream sales both spike in the summer. But does eating ice cream make you a murderer? Of course not,” he noted.

See related:  New lenders shun FICO, create their own scores

Blockchain, smart contracts and oracles may make underwriting easier

Blockchain, smart contracts and oracles are just the right tools to further aid in easing credit underwriting standards, said Sudhir Khatwani, co-founder of the website TheMoneyMongers.

Blockchain technology underpins digital currency (Bitcoin, Litecoin, Ethereum, etc.), allowing digital information to be distributed, but not copied.

Blockchain oracles are third-party information sources that supply data to blockchains, which enable the creation of smart contracts.

Smart contracts are computer protocols designed to digitally facilitate, enforce or verify the negotiation or performance regarding a contract, and they enable people to conduct credible transactions without using third parties.

Let’s say you want to apply for a home loan in a digitally transformative world powered by all these technologies.

The first thing you would do is pull out your mobile phone and complete the application.

You’d likely see it getting processed within minutes and get a loan decision shortly thereafter.

“My prediction for automated credit underwriting would begin with the complicated neural networks powered by AI and ML analyzing your social media connections, credit scores, SSN, income, taxes and your assets,” Khatwani said.

In that world, your assets — like real estate, stocks or mutual funds — would have been already tokenized or digitized, meaning that sensitive data is replaced with a nonsensitive equivalent, or token, that has no extrinsic or exploitable meaning or value.

These tokenized assets would be present on a blockchain with cloud-based oracles, which provide servers, storage, network, applications and services through a worldwide network of Oracle Corporation-run data centers.

And they would show your exact financial and social status to the underwriter who’s deciding on your application.

“I also see the tokenized assets being kept as collateral during the issuance of any credit,” Khatwani said. 

These tokenized assets would be locked down under smart contracts powered by blockchain technology, reducing the cost by eliminating the need for physical property surveys and additional legal work related to using traditional collateral, Khatwani added.

Perhaps card issuers will use technology to revisit credit limits

Rossman said he thought card issuers will increasingly use technology to revisit credit limits.

During the Great Recession, many card companies closed little-used accounts or lowered those credit limits because they represented liabilities at a time when lots of people were losing their jobs and falling behind on payments, according to Rossman.

Especially during the next downturn, whenever that occurs, card companies could use machine learning to assess risk closer to real time, he said.

“They could use this technology to slash the credit limit of a cardholder they believe is unlikely to pay them back, or even close the account entirely,” Rossman explained.

Consumers will expect more instant card approvals

Another interesting aspect of the digital transformation affecting credit card underwriting, Rossman said, is that consumers are and will be expecting quicker approval decisions.

The Apple Card and the new Capital One Walmart Rewards Mastercard promise consumers instant decisions, and prospective cardholders can apply via an app.

“Once approved, they can begin using their cards immediately via their phones — no more waiting a week for a piece of plastic to arrive in the mail,” Rossman said.

Digital changes will likely affect the credit underwriting job market

Jobs in the financial technology space are already growing at a rapid rate, Prakash said.

The global fintech industry is expected to reach over $300 billion in the next four to five years, and within fintech, credit underwriting remains a rapidly developing sector, she added.

Prakash said we’ll likely see changes in the credit underwriting job market in sync with the digital transformation that’s occurring.

“For instance, as machine learning becomes more important to financial and credit card companies, we’ll see increased demand for machine learning and artificial intelligence experts,” she predicted.

Similarly, analysts who have expertise in sourcing, tracking and understanding alternative underwriting data will be in big demand.

Business development staff who can form creative partnerships between different players in the credit underwriting industry will also have a strong role to play.

Lenders can beat the competition with digital transformation

A digital toolbox can help lenders beat their competition in all areas, from marketing to credit decision making to loan servicing.

It can also enable lenders to skillfully identify, serve and gain new customers.

As digital transformation evolves, only one thing is predictable: More change is sure to come.

Editorial Disclaimer

The editorial content on this page is based solely on the objective assessment of our writers and is not driven by advertising dollars. It has not been provided or commissioned by the credit card issuers. However, we may receive compensation when you click on links to products from our partners.

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Credit Card Rate Report Updated: May 27th, 2020
Business
14.03%
Airline
15.50%
Cash Back
16.06%
Reward
15.82%
Student
16.05%

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