The biggest trend shaping AI in lending this year

Artificial intelligence is transforming lending, helping borrowers make better decisions and empowering lenders to deliver satisfying customer experiences. The most important trend shaping AI in lending this year, however, centers on accelerating fairer and more inclusive practices across lending. Traditional lending practices reflect human bias, making it harder for applicants from diverse backgrounds and life experiences to obtain loans. AI in lending is change this dynamic, making borrowing more accessible to people who would otherwise be overlooked.

A recent study conducted by NYU Stern School of Business in conjunction with several industry partners and included assistance from David Snitkof, head of analytics at automation platform Ocrolus, confirms this trend. The study, which evaluates racial disparities in access to small business credit across the United States, looked at how this dynamic played out in the Paycheck Protection Program (PPP). Data from 12.9 million PPP loan documents processed using Ocrolus’ lending automation lending solution showed that fintech lenders and large banks that used automation in lending originated a larger proportion of PPP loans than smaller banks that relied on human-centric loan processes.

While small banks only issued 3.3% of their PPP loans to Black-owned businesses and 7.8% of Wells Fargo’s PPP loans did the same, 26.5% of PPP loans originated by fintechs went to Black-owned businesses. In fact, although fintech lenders only represented 17.4% of all PPP loans in the sample considered, they originated 53.6% of PPP loans to Black-owned businesses. These businesses were 12.1% more likely to obtain PPP loans from a fintech than any other type of lender.

Applicants and lenders alike benefited from the efficiencies gained through automation. One regional bank even found that because it could process loan requests in two days as opposed to the 10 days it previously took using manual processes, it was able to serve not only existing customers but also a broader and more diverse set of applicants.

Automation Is helping create more equitable lending practices

Fintechs are using AI in lending to enable fairer lending practices at scale, wielding increasing influence on the entire lending industry. According to McKinsey, fintechs are already redefining customer expectations and creating new business models. As they do, they are emphasizing financial institutions’ weaknesses in digital user experiences as well as in operational efficiency. At the same time, recognizing that they can no longer ignore the competitive threat that fintechs represent, financial institutions are accelerating their digital transformation initiatives. As research from BDO indicates, 61% of financial institutions are currently deploying AI or machine learning, and 35% of them plan to do so in the near future.

As fintechs lead the way in making lending practices fairer, banks that want to compete will have a strong incentive to begin adopting fairer lending practices as well, making lending more equitable by default. Although traditional lending practices have excluded diverse small businesses from the same opportunities as their white counterparts because they relied on human-centric processes, AI in lending will soon level the playing field for everyone.