Today, we would like to profile a company using artificial intelligence to great ends within the realm of lending: Upstart.
We were inspired by this company after learning how much they dedicated themselves to improving peer-to-peer lending.
We were impressed by how it set itself apart from the crowd. Read on to learn our assessment!
Google has a reputation for turning out employees that go out to create new ventures.
The Google mindset of making things faster, easier, and more profitable at a rapid pace seems to be highly applicable to starting a new business.
Among these employee-led ventures? Twitter, Foursquare, and Howcast, as just a sample of that long list.
Upstart follows the Google standard of disrupting an industry for the sake of efficiency.
They calculate loan payback probability based on different factors than traditional banks, such as education.
A traditional bank doesn’t care about GPA or a person’s college degree. But Upstart takes it into account as a factor for future payback.
Why does this matter?
Upstart may appeal to younger borrowers that may not have a robust credit score (or anything at all). If they’re treated as more of a future borrower than a current borrower, they’re more likely to be granted a loan.
This sets Upstart apart as the young, hip lending option compared to stuffy banks.
But this is also a lot of faith to put in people who have very little to offer the financial world. At least, that’s how they may look on paper.
Artificial intelligence can often be misused in the tech world.
The concept is new and exciting. People see it as a shiny new toy that they can play with versus a tool that they can utilize.
Many (at least many that I’ve seen!) talk about ways of using AI in ways that make people scratch their heads. We want to ask: “But why use AI for that?”
Upstart, however, has an understandable use for AI.
Traditional lenders focus on who the borrower has been in the past and predicting payback percentages from there. But Upstart sees things differently.
Their perspective is that loans should be based on how much the borrower will earn in the future.
By using AI to predict future earnings, they’re predicting borrowers’ ability to pay them back over time.
This can be a huge boon for people who don’t have a massive credit score but who may provide reliable returns on investment.
Upstart equips machine learning as part of their process, which is defined as priming machines to learn and improve their process without constant intervention from people.
It’s quite a revolutionary perspective for finance.
Upstart is being progressive by essentially allowing their machines and learn from their mistakes regularly. They can help make better loan granting by doing it enough times and watching the results.
This is a pretty new thing for finance.
Many people trust other people more than machines when it comes to something like loan approval.
But humans aren’t always good at predicting the future. If someone misses one payment once, that doesn’t mean that they’ll miss payments in the future.
A machine also doesn’t have “gut feelings” that may sway a human in spite of that person’s most likely future action.
According to Upstart’s own reported results, rates of loss are much lower than other lending platforms. The difference is as much as twenty-five percent across similar credit scores for borrowers.
Personally, I’ve seen great results as an investor. Compared to Lending Club, returns are higher and I have yet to have a default!
This all comes down to their approach of using machines to help in the selection process for borrowers.
Machines are better at predicting who will be a better return on investment than human intuition. As of December 2017, fully forty-seven percent of their loan decisions were automated.
But even if you’re a little nervous about machines making decisions about who will receive your money, Upstart is a good choice for other reasons.
Overall, I recommend Upstart to anyone looking for a peer-to-peer lending network that cuts down on the noise of the process. They’re always refining their process to make sure your money goes to the right people.
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