AI Case Study
BankMobile approves loans for young banking customers based on non-traditional data measures using Upstart's machine learning
BankMobile is planning to implement Upstart's online lending software which assesses loan creditworthiness by using machine learning to model risk based on alternative data. This is is intended to target younger customers who may have no traditional credit history.
According to Forbes, Upstart "leverages AI and machine learning to price credit and automate the borrowing process". It works to "gather as much data as possible about loan applicants. Far beyond traditional credit data, we look at things like education, employment history, how they interact with our application, etc. The amount of data in our credit decision is dramatically larger than what other lenders typically use. Next, we use AI-ML techniques to help us understand the data we've gathered and to accurately model risk and then ... observing the performance of our personal loans on a day-to-day basis. Thus our model continually learns how to price the next loan."
American Banker reports that "Upstart was also willing to modify its software to BankMobile’s requirements. For instance, the bank offers its customers a 25 basis point discount on loans if they fund them through their BankMobile account, and provides 1% back after 12 months of consecutive payments. It charges no origination fee and a slightly lower rate than Upstart’s algorithm would normally set. (Loan rates range between 6% and 29.99%.) ... Integration of Upstart’s software and BankMobile’s website and app took only a couple of months".
However, American Banker also points out that some of their data usage has been potentially problematic. "In addition to using artificial intelligence, Upstart partly relies on education data to assess creditworthiness. The use of education data in loan decisions has been controversial and is still being examined by the Consumer Financial Protection Bureau. In September, the CFPB sent Upstart its first no-action letter, which meant the online lender could continue doing what it was doing but must send quarterly reports to the agency about its loan applications and decisions."
BankMobile is targeting students and its other young users for loans. These segments are typically underserved because, as Forbes reports, "credit is really hard to build for millennials, which is why Upstart uses non-conventional variables, like employment and education data, to help young people with short credit histories secure a loan".
Planned; results not yet available
From American Banker: "BankMobile applicants share their highest level of education obtained, the name of their school or university, their graduation year and their area of study. That information is what Upstart’s underwriting software uses to make its credit decision. Eventually the data will probably be prepopulated from BankMobile’s databases". Additionally Upstart uses credit bureau and FICO data.