How Big Data is changing lenders industry?
By now, most banks and financial institutions are already investing in big data. They’re pulling data from their customers and financial markets in new ways, and they’re hiring more data analysts and engineers to make the best use of that data. In fact, by the end of the decade, we could see the global existence of 45 zettabytes—that’s 45 trillion gigabytes—and an enormous shortfall of data analysis talent to keep up with demand.
So what exactly are banks using all this data for? In addition to making better investments and improving infrastructure and technology, many banks are putting this data to use in the lending sector—which could herald the changes necessary to spark a revolution in business lending.
The Business Lending Problem
Small business loans are an option available to aspiring entrepreneurs who have strong ideas for new businesses, but not enough capital to make those ideas a reality. Unfortunately, banks are notoriously strict about who they give loans to and how. From a logistical perspective, this is a necessity; if banks lent money to everyone, they’d never make a profit, and they’d cease to exist.
But current circumstances make it hard for entrepreneurs with little experience, or those with poor credit, to get a loan. Secured business loans—which require significant collateral—are a viable alternative for businesses investing in expensive equipment or property, but with unsecured loans as the priority, this possibility isn’t enough to justify new entrepreneurs jumping into the fray.
Why is this problematic? Under this approach, loans are only available to entrepreneurs with a proven history of success—who probably don’t need the loans anyway—or business ideas with a surefire path to success—who will be getting offers left and right. And since startups account for tremendous economic impact (including 50 percent of all new job creation), any limitation in entry for new entrepreneurs can result in a diminished collective economy. Not only will we have fewer businesses and job opportunities, we’ll also see fewer technological innovations.
How Big Data Is Changing Things
Fortunately, the emergence of big data is allowing more entrepreneurs to get the loans they need—while still allowing banks to remain profitable.
These are just three ways it’s happening:
- More than credit scores. First, banks will have access to more data than just a person’s credit score. At a glance, lenders have historically either written off loan candidates or accepted them almost immediately based on their current credit score. However, a credit score can’t tell you a business idea’s worth, nor can it tell you a person’s working history, or even their current financial knowledge. Incorporating more data points means seeing a fuller picture of each prospective candidate, which means making more accurate and thorough assessments.
- New types of loans. New data points and financial service innovation could also lead to the creation of entirely new types of loans. For example, banks may be able to personalize certain conditions to favor riskier entrepreneurial ventures. Greater customization means better fits for prospective clients, and a wider pool of approvable loan applicants.
- Better risk assessments. Lenders’ first responsibility is to analyze risk, much like underwriters—who are already making extraordinary use of big data in their respective field. Banks need to know how much profit they’ll stand to make from a given transaction, on average, and what they’ll stand to lose if the deal falls through. With limited information, these projections are often subjective and unreliable, but as banks begin to collect and successfully analyze more data points, they’ll be able to form a clearer picture of risk and reward for potential loans. That could potentially open the door to previously risky-seeming deals, with new variables influencing their decisions.
As big data continues to grow in volume, complexity, and availability, more financial institutions will begin building their lending programs on its foundation. That doesn’t necessarily mean that every entrepreneur with a business plan is going to get a loan, but if we see even a 10 percent increase in loan availability for worthwhile ideas and innovators, it could have a drastic impact on our productivity and quality of life.