To make decisions on potential borrowers the leading
payday app in China, Yongqianbao collects more than 1200 data points. The Wall
Street Journal article states they are using artificial technology AI to
analyze data and behavior. To put this
in context let’s look at some of the more interesting AI methods Yongquianao
uses in making business decisions for potential borrowers. “iPhone users tend
to have lower late-payment rates than Android phone users, and people who don’t
answer calls or whose outgoing calls go unanswered represent a higher default and
fraud risk”. Other red flags include making many changes when filling in the
application, letting batteries run down and changing phones frequently. “Multiple
applications from a single Wi-Fi hot spot is a danger sign”. Also, users who
borrow in one city but spend in another are considered lower risks.
AI aside the alternate data being used by a competition
loan service companies or Fintech companies analyzes mobile usage and online
shopping tends to assess credit risk. The conventional data we are accustomed
to such as credit score, loans outstanding, criminal history, previous account
defaults are “old school” methods of making loan decisions.
The Chinese market for online loans last year accounts
for roughly 1.2 trillion yuan or $174 billion. About 80% of its borrowers are
younger than 30 and the most interesting point was that loans past the 60-day
due date stood at 2.8% in February; which is not bad considering they approved
1.2 loans worth 1.8 billion yuan ($270m). Yongqianbao, whose approval rate for
first-time applicants is 20% to 30%, is run by engineers. Fintech competitors say,
“the power of artificial intelligence is bringing default rates down by finding
correlations between smartphone behavior and risk and using them to create
tools that can analyze creditworthiness in an instant”.
There are certain ethical considerations to all of
this…
First financial tech companies without AI technology
already have wealth of data to draw from when making loans decisions. Are those
traditional data points not enough already? The use of AI to know instantly
where you are typically every day, to know how much charge is in your phone, if
you made any changes while filling out a loan application; certain seems like an
invasion of privacy to me. Loan companies and payday lenders already hedge their
bets with fees and interest, now with AI they can guarantee they will (97% of their
time) get their money back. With limited or almost no risk, then you would
think fee and interest would come down? Well the article does not expand on
this point but my guess is fees and interest will not come down.
My concern is that just because China is currently
using these technologies and methods does not mean that soon the US lenders
like PayPal won’t. Given the history and current conditions of our financial
services industry; I see little downside and huge upside. Especially if we
consider a company like Wells Fargo opened thousands of accounts for customers
without authorization; who is to say banks won’t implement these technologies
in the backend or house these operations overseas far from the purview of the
CFPB and FCC. It is a mighty slippery slope and it feels like and step to far
into one’s personal life.
If these big data
technologies were to find their way in to US loan decisions (eventually), I fear
it will only come to light after an investigation or whistleblower reveals it.
Financial tech firms and lending institutions have a history of skirting the
law and concealing data analytics to their 
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