Fintech
Lawsuit, subpoena, ask fintechs to revisit AI
The Navy Federal class action lawsuit has led financial institutions to review their fair lending practices and consider how artificial intelligence fits in. For Amount’s director of decision science, Garrett Laird, the conversation is nuanced.
Second CNNNavy Federal’s nearly 29-point gap in approval rates was the widest among the top 50 mutual lenders in 2022. It persisted when taking into account the applicant’s income, debt-to-income ratio, property value and down payment percentage.
The disparity in homeownership is greater than it was in 1960. A white family is 55% more likely to own a home than a Hispanic family and 70% more likely than a black family. Thanks to the power of homeownership, the average median wealth for a white household is $285,000, $61,600 for a Hispanic household, and $44,900 for a black household.
Questions raced through Laird’s mind when he heard the news from the Federal Navy. What was their underwriting process like? Was it more subjective or systematic? Has a systematic policy led to disparities? What controls were in place to prevent this? Whatever the reason, this is a significant failure, given the stark differences in advertised approval rates.
“At Amount, we pride ourselves on automating decisions, making them easier and faster,” Laird said. One of the benefits is greater control. You can remove human biases to some extent. There may still be biases in datasets, policies and algorithms, but they can be measured empirically. There you don’t have to worry so much about the human aspect.”
“I want to know what these controls and processes look like at Navy Federal and how they got to where they are. Hopefully some of this will become public knowledge.”
Most financial institutions still rely, to some extent, on the human element. Laird said they like to keep a manual option, say, for a longtime customer. The danger comes if such exceptions are used for some groups more than others.
Artificial intelligence and fintech represent huge opportunities for credit unions
Automated decision making is becoming more and more widespread. That’s one reason Laird is excited about Amount’s partnership with Velera (formerly PSCU/Co-op Solutions). The amount supports Origination Solutions, Velera’s new digital lending suite.
Smaller credit unions and community banks have different mandates than larger institutions. They exist to meet the needs of their members. They are good at building relationships but need help with automated scoring. Add that automation while maintaining the personal touch and there are huge opportunities.
Credit unions offer a much broader range of services than fintechs, which leverage more modern technologies. When the two are combined, credit union members can benefit from a variety of tailored opportunities.
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Separate the different types of AI
Laird warns leaders to be careful about using artificial intelligence. Yes, there are clear reasons for more efficient document processing and data extraction. However, the fervor against large language models is misplaced because they lack explainability.
“There is absolutely interest in AI for lending, but different types of AI,” Laird said. Logistic regression has been around for decades but it still works and adds a lot of value.
“We’ve seen this with other customers using these models. For a fintech lender, I know they are using more advanced algorithms for underwriting decisions. They have become comfortable with their ability to explain these findings and are moving forward in doing so. So there is still movement in that space.”
Laird believes credit unions and community banks are more interested in traditional machine learning techniques that are explainable.
Linear’s acquisition of Amount will soon bear fruit
In 2022, Amount acquired an SME lending and account creation platform, Linear, for $175 million. The deal creates a company with strengths in commercial and consumer services.
Laird said the last 18 months have been spent combining the two companies. Once completed, customers will benefit from a wider range of products that can be offered when they need them. Perhaps a commercial loan applicant needs a checking account for a small business, or a consumer borrower would benefit from a credit card or refinance.
“Having all of this together in one place is exciting,” Laird admitted.
More and more customers are looking for proactive advice. Laird said this fosters the elusive stickiness that every institution aspires to.
The advantages of open banking
The advent of open banking is significant, as Laird sees it as helping him better serve customers in their time of need. He also forces serious institutions to be more proactive, especially with their data, because if they don’t, someone else will.
“I think it’s going to be a really good thing for consumers,” Laird said.
Why the SEC’s Upstart Subpoena Matters
Laird said the outcome of the SEC’s subpoena into Upstart’s models and lending will have a crucial impact on fintech’s use of artificial intelligence and the role of explainability. If Upstart gets the green light, all will be well. If complications arise, many companies will review their plans.
This would be a shame, as many current assessment methods perpetuate disparities. As soon as the FICO score drops to 660 or lower, customer offers quickly deteriorate.
“There is no difference between a 661 and a 659 other than being labeled prime,” Laird said. “The typical banking industry is taking a step back and refusing to engage with that customer base. They don’t give them loans, or if they give them credit cards, they’re not the same credit cards that a primary customer gets.
“It becomes a self-fulfilling prophecy: anyone below that threshold is more likely to default. This has allowed fintechs to exist, gobbling up market share that banks were unwilling to touch, but it also has negative outcomes for customers.”
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Tony is a long-time contributor in the fintech and alt-fi spaces. Twice named journalist of the year at LendIt e winner in 2018, Tony has written more than 2,000 original articles on blockchain, peer-to-peer lending, crowdfunding, and emerging technologies over the past seven years. He has hosted panels at LendIt, the CfPA Summit, and DECENT’s Unchained, a blockchain expo in Hong Kong. Email Tony here.