“Faceless” FinTech a force for good
Blogs on 2nd July 2019
Posted on 02/07/19 by Rolf Merchant
For all the hand-wringing about the impacts on AI in our lives, the early signs are positive – at least in the realm of FinTech.
According to a recent paper for the US National Bureau of Economic Research, the rise of artificial intelligence in financial services is playing a role in curbing racial discrimination in the consumer lending market.
‘Consumer-Lending Discrimination in the FinTech Era’, compiled by four University of Berkley academics, shows that FinTech algorithms discriminate 40% less than face-to-face lenders in the US household mortgage market.
This is by no means inconsequential. On average, African-American and Latinx borrowers pay 7.9 basis points more for purchase mortgages and 3.6 basis points more for refinance mortgages. As a result, these demographic groups combined pay extra interest payments to the tune of $765 million per year. FinTech is helping to reduce this huge disparity.
The study also shows that FinTech lenders do not discriminate in decisions about whether to accept or reject mortgage applications. This is removing a barrier to entry to the mortgage market for some African-American and Latinx people in the US.
At present, 6% of Latinx and African-Amercian applications are rejected purely because of the applicant is from a minority group. To put it another way, somewhere in the region of one million mortgages are refused to people who are perfectly able to service a mortgage. Quite apart from being grossly unfair, it represents a huge opportunity lost for consumers and businesses alike.
However, as the authors acknowledge, these findings do not amount to FinTech acting as a panacea for the ills and iniquities that exist in the consumer mortgage market.
FinTechs may still be discriminating through pricing strategies. Since algorithmic pricing of loans is designed to be profit-maximising, algorithms could create strategies that result in higher loan prices for certain minorities. This could be particularly the case in parts of the world with less competition among lenders or where people are less likely to shop around for the best deal – two data points which can readily be extracted by algorithms.
This issue, so say the authors, needs further exploration. After all, it’s one thing to grant someone a mortgage, but it’s another to tie them into pricey repayment terms based purely on their race or ethnicity.
Nonetheless, the paper shows us two big positives. First, discrimination in mortgage lending is already decreasing, and the recent advent of FinTechs in the market appears to be a driver in this. Second, algorithmic lenders do not show discrimination when deciding whether to accept or reject a mortgage application.
Algorithms may sound cold and calculating, but in this case, they are clearly acting as a genuine social good. It is undoubtedly a feather in the cap for FinTech that it can work to dissolve some of the social discrimination that continues to exist among lenders.
Mortgages and home ownership are highly sensitive and incredibly important for consumers’ financial wellbeing and quality of life. The good news is financial services is going in the right direction to remove biases from this market.
Innovate Finance is hosting Shining a Spotlight on Financial Inclusion on 16 July. Come along to find out more about FinTech firms at the forefront of innovation to help make financial services accessible to all.