I’ve had some fascinating discussions over the past two weeks about the future of credit, lending, banking and finance. The Asian Banker Future of Finance Summit in Dubai provided the ultimate genesis of this week’s column, on “Smart Lending”. Profuse thanks to Emmanuel Daniel, Mohammad Shaheed Khan, Raja Al Mazrouie, Serdar Guner, and others for providing inspiration.
Finance professionals keep asking me if blockchain is real. My response to them is “that’s not the point”. (The answer, by the way, is “yes”, it’s real”. However, as we’ve said in our recent books on fintech and on blockchain, we believe the long term opportunity is in data versus currency.)
But blockchain, or not blockchain, or AI, or not AI, or quantum, or not quantum, or big data, or not big data – these are all ingredients rather than the meal. The reason why financial services is undergoing transformational, irreversible business model and structural change, is the convergence of several tech disruptions at once.
Let’s reason by analogy. We had the smartphone, more or less, in 1993. It was called the Apple Newton. (or if you really want to dive deep, take a look at GO – Jerry Kaplan has written a wonderful book about handheld computing called Startup). Computational power wasn’t there, screen tech wasn’t there, battery life wasn’t there, wireless data networks were primitive, consumer adoption of new tech was minimal, the internet as such was an academic tech used by a couple of million people globally – the convergence of forces for the mobile revolution simply weren’t present.
Today, there are over 4 billion smart phones in the world, and multiple industries from transportation to health care are being transformed by these and similar technologies.
In financial services, we see a convergence of blockchain, AI, mobile internet, data / analytics for credit, and consumer behavior and regulatory acceptance around new financing models, that create the potential for what I will call “Smarter Lending”. Just as smart contracts harness the potential of blockchain, with new automated methods for execution and management of agreements, so Smarter Lending will reshape finance and communities.
What’s the basic model of lending today? Not much different from the model of 50 years ago. There is an old expression in commercial banking: “Borrow at 3, lend at 6, on the golf course by 3”. The idea was to obtain cash (in the form of deposits or federal funds) at a rate of 3%, lend them out at 6% (running the bank on that 3% margin), and you could spend lots of time playing golf. But times, they are a’changing.
Banks spend a great deal of time worried about origination and marketing, and on the other end of the life cycle, tremendous cost and/or effort when a loan defaults dealing with workout and writedown. In between, a happy loan is a quiet loan – you collect interest from the borrower and perhaps repay principal over time, and then get the loan repaid by the end of the term.
A huge opportunity missed. Apple makes devices and services we deal with every day, that we feel really good about, and has a net promoter score of 89. In the world of banking, some of the largest banks in the world have negative net promoter scores. That’s right, more customers don’t like them than like them, by a significant margin. No wonder fintechs are glomming up traditional bank customers left and right.
Despite all of the changes in financial services, new lending models remain a tiny fraction of the US$42 trillion in the global consumer lending market – leaving 2 billion people out of the system. On the small business side, the credit gap (loans they need, that they can’t obtain) is US$2.6 trillion.
Forces of change are looming. Crowdfunding is accelerating and this year is expected to surpass venture capital as a source of money for private companies. New credit analytics models (like those from my new company, Distilled Identity) can provide 30% to 50% better prediction of losses to lenders, enabling them to better manage risk. These things are happening now.
Let’s go further into the new future: what could the combination of blockchain and AI and data/analytics and some of these other trends provide to lending? Is there a new model for banks where they aren’t central to the transaction, but merely a convener or facilitator?
Imagine a world where local communities are explicitly, not implicitly, brought together by loans for local businesses and real estate. Instead of deposits giving money to banks, who anonymously pool those funds and then lend to a local business, imagine financial institutions facilitating a crowdfunding experience where the local community personally identifies with the portfolio of businesses they underwrite, and then have social incentives to help ensure the success of these local enterprises.
This not only would make a closer relationship with the bank, as the convener of this community spirit, but also would foster a stronger community, both economically and socially. The technology to achieve this kind of smarter lending on a cost effective and scalable basis is already here – all we lack is the will and effort to make it happen.
MIT may have commercial or other relationships with one or more companies mentioned in this article. I have identified clearly where I have commercial interests. In particular, Distilled Identity could be a facilitator of Smarter Lending.
