Is conservative approach to new technologies holding back Credit unions?

Author | Jim Kasch

Credit union leaders, so by virtue, credit unions themselves, are conservative by nature. We prefer to measure three times and cut once. We tend to be slow in adopting cutting edge technology, though we frequently hide behind sticker shock. Our conservative nature is rewarded and reinforced by our regulators, who, in the words of industry veteran Tom Glatt, have never met a risk they like.

Now, I won’t go into how I believe that conservative nature has dug for us a hole that the industry must emerge from, or how we are too slow to respond to changes in market conditions, or to new entrants into our space. About how that conservative nature has left millions of dollars in earnings on the table, and thousands of members without the help they deserve. Or about how that conservative nature runs counter to our very operating philosophy. I’ll save that for another time.

What I do want to share is this: If you are a true credit union person, and you subscribe to a conservative approach to our business, how can you justify NOT using advanced artificial intelligence to help you make underwriting decisions? After all, lending, and particularly consumer lending, remains the lifeblood of our business. In nearly every case, credit unions were founded to bring credit to those who weren’t being served elsewhere. Lending is the primary driver of our economic engines. In short, it’s the most important function we perform as institutions. So, doesn’t it make sense that we would burn an appropriate number of corporate calories on the subject to ensure we are operating to the best of our abilities?

Consider that you kind of already do use artificial intelligence in your loan decision making. After all, FICO is just a model score that is a composite of several borrowing factors. Granted, it’s slow to update and it’s limited in scope, but you use it anyway. At least, most credit unions price their loans according to the FICO model, even though we now know that FICO is an extremely limited tool when it comes to predicting borrower performance.

Advanced AI underwriting doesn’t rely on 8-10 factors, or even 20 or 100 factors. It takes about 2,000 factors into consideration when decisioning a loan application. No human can do that, let alone do it within microseconds. Which decision would the conservative lender trust more: the one made by considering 10 factors, or the one considering 2000 factors?

Richer data provides insights that are otherwise hidden from human underwriters. For example, understanding a borrower’s performance in paying rent, for their cell service or other expenses not included in the FICO model; how frequently the borrower changes addresses; how their spending behavior has changed over the past several months; or whether they have switched from someone who paid off their credit card balances every month to one who now carries a balance. Not only can advanced AI platforms consider all this data (and much more), but they do also it in microseconds.

Beyond that, through machine learning, the system makes better decisions over time. It considers the performance of the loans it approves and makes necessary adjustments to improve loan performance. “But” I hear you saying, “what about the art of lending? The personal stories that are important to understand. Certainly, loan decisions can’t come down entirely to black and white.”

If I had to choose to have all my loan decisions made by a human underwriter or by an AI-driven decision engine, there’s no contest. The AI engine will outperform human underwriters in volume, quality of decisions, speed of decision, member satisfaction, and loan yield. Fortunately, we don’t need to make that choice.

I am not suggesting we abandon the human element in the lending process. I am suggesting that our human lenders will be considerably better equipped to make smart decisions on loans if they had more data at their disposal.

The bottom line is this: if you are truly conservative, you want to make the best underwriting decisions you can. And the best underwriting decisions must come with the assistance of advanced technology. Period. So, if you are as conservative as you claim to be, you should be using the best available technology to prove it.