The ongoing fintech revolution of financial services has already transformed personal finance offerings in many ways, making life easier for consumers.
Going forward, AI and big data will likely continue to play a larger role in the consumer loan space, having the potential to ultimately replace the FICO score (which today is used by banks for consumer risk assessments) and slow-moving, legacy underwriting processes involved with lending transactions.
The current loan process - whether one is applying for a credit card, a car loan, or a mortgage - hinges heavily on the borrower's FICO score. FICO scores typically range from 300 to 850, and a higher score indicates better credit.
This score, which can make or break a consumer's opportunity to buy their first home, is based on data about the status of existing and prior credit accounts pulled from the three credit bureaus: Equifax (NYSE: EFX), Experian (OTC: EXPGY) and TransUnion (NYSE: TRU).
According to the personal finance website NerdWallet, the Fair Isaac Corp. introduced the FICO score in 1989.
A lot has changed since then.
Today, millennials post their career status and history on LinkedIn, socialize over Facebook (NASDAQ: META), make a great amount of their financial transactions over platforms like Venmo (NASDAQ: PYPL) and Zelle and get paychecks via crypto payment or eCheck. Meaning, a person's FICO score isn't capturing their true financial ecosystem.
Given this, in the digital economy, AI and blockchain technology can be tapped to give a much more accurate credit rating on consumers. (If tapped properly, the credit approval and underwriting processes can be done in record time, too.)
FICO's Billionaire Problem
Can you imagine a billionaire businessman being denied a mortgage for an investment property? Or being offered a non-attractive interest rate, based on their FICO score? Or a multi-millionaire not being able to buy an airline ticket without a credit card, which they don't have because they never had a need to open a credit account.
Given the current FICO credit rating processes, these types of situations can happen.
FICO is based on data regarding existing and prior credit accounts, so a reliable borrower who pays their utility and cellular bills on time every month may be denied a loan because they have never opened a credit card account and have no outstanding debt.
Shouldn't this be looked at as a good thing - that they haven't before needed the credit?
If it can happen to a billionaire, it can (and does) happen to many other potential creditworthy borrowers in any income range who lack a credit history.
Given the potential to verify a consumer's financial life via AI and blockchain technology, this problem can be solved in the future.
Mining the Data
The blockchain ledger is an undeniable audit trail. In the future, this has the potential to become a more accurate source when verifying a borrower's job status and career history - as opposed to a human sifting through paper paystubs that can be forged or created through fraudulent acts.
This can also dramatically cut down today's drawn-out loan and credit processing times - with 30, 60 and 90-day closings for home loans eventually becoming things of the past.
AI and blockchain solutions are already being used by emerging fintechs in the consumer loan and lending space. But the future in this space is wide open with many opportunities for further improvement and growth.
Think about the power of AI: imagine it being used to quickly dig through various applications that consumers use to find out things such as where someone currently works, how often they pay their Amazon (NASDAQ: AMZN) and cell phone bills.
You can even find property taxpayer information today on Zillow (NASDAQ: ZG), which is a major advancement compared to the days when you had to physically go to town hall and request these records.
This level of user authentication can bring a new degree of reliability to consumer credit scoring methods.
It can also make the consumer credit/loan application and underwriting processes so much simpler than they are today.
This is a light at the end of the tunnel compared to the legacy loan processes currently in place.
The disruption has already begun, and the industry is moving at a rapid pace in this direction.