With friction disappearing in every possible area one can think of, borrowing money should not be a painful experience. For the moment, however, that’s mostly still just theory. In practice, there are still many issues for people in getting easy access to funds to help with everything from home repairs to preschool.
For starters, there’s the way institutions look at you as a borrower. Traditional credit metrics like FICO now seem restrictive and outdated because they were designed at a time when much less data could be known about potential borrowers. These metrics don’t take into account many characteristics that would make someone a better credit risk than those blunt scores would indicate. Those scores and the way they are calculated are still less than transparent, making it difficult for borrowers to even know how they could be better managing their public-facing profile. Second, traditional banks have become more restrictive regarding who they will lend to. This means that many borrowers with less than perfect scores will be shut out of the system entirely. Third, in the traditional models, applying for and getting cash can be a time consuming process that does not get people cash when they need it. And lastly, there is a limited range of products available to borrowers at traditional institutions.
This isn’t how things should be, and thankfully the world of consumer lending is changing. A new generation of lenders can see people as more than just their credit score, and are creating more transparent and robust systems to make real-time decisions on lending that take more characteristics into account. Because lenders have more information about borrowers available to them, such as career and education, and the investors who buy the loans, a more complete picture of “what works” is emerging and allowing for those scoring systems to evolve. This information availability and competitive scoring creates competition among lenders, which helps to lower borrowing rates for consumers.
These lenders are also making it easier for borrowers by offering services online and with easy user experiences - a natural evolution for a world where the internet is a consumer’s first stop; not an adjacent access point.
These improvements are noteworthy, but much still remains to be done. In retail, such as in the restaurant or travel industries, consumers can get a variety of options presented to them by different vendors along with ratings and reviews at services like Expedia, Kayak and TripAdvisor. Consumer borrowers, however, still have to go to multiple lenders or sites to find out all options. Information is fractured and incomplete, which makes the experience confusing and frustrating for a borrower. A consumer might, for example, hear about a lender on the radio or in a subway ad, go to their website, only to be rejected for a loan -- when another lender that specializes in their type of loan or credit profile would have approved them and they could have had their money in days.
The infrastructure for real-time lending is in its early stages. Many lenders haven’t built out the necessary tools to enable the best user experience. And even if that infrastructure were present, the market-based model of alternative lending still requires more liquidity. Transparency with new credit models is growing but still in its infancy, so borrowers are still too far in the dark to make informed financial planning decisions.
Outside of the world of consumer lending, financial services integrations are still rare between disparate products. Financial planning and automated investment services such as Betterment and Wealthfront help consumers save and invest, and credit-report services such as freecreditreport.com Credit Karma, and Credit Sesame help consumers understand traditional scores - but why can’t all of these services be combined into a comprehensive view that combines debt, savings, risk and investing?
The reason, just as within the alternative lending space itself, is the infrastructure- the connective tissue necessary to power the next generation of consumer financial services is not yet present.
Even Financial’s goal is to address this connective tissue problem, initially by bringing more and better quality borrowers into the marketplace lending ecosystem - and by using data more effectively to match borrowers with the right lender and loan product at the right rate.
From there, we’ll see...