Inside Financial Services

For On-Line Lenders, It’s Not the Algorithm, It’s the Growth Rate

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Bloomberg Markets profiles an on-line lender brimming with ambition:

For Avant’s Al Goldstein, being the quickest online-loan startup to lend $1 billion isn’t that cool. He wants his 2½-year-old company to be worth $100 billion, on the scale of Bank of America or Citigroup. “Our long-term vision for Avant is to build the Amazon of financial services,” says Goldstein, 34. “The opportunity is massive.”

While eventually Goldstein wants to expand around the world with auto loans, credit cards, and maybe even mortgages, Chicago-based Avant has only one product to date: installment loans for people with a few dings on their credit report. Other lenders would call some of these borrowers subprime. Goldstein calls them “the underbanked middle class” and says they have few options for credit. Traditional banks make it difficult for them to get $5,000 or $10,000 loans, he says. Using Avant’s app, they can request money almost like they’re hailing a car with Uber and have it as soon as the next day.

Aspiring to a $100 billion market cap by being an “Uber for lending” for subprime consumer borrowers doesn’t strike me as likely to produce the sort of enterprise that’s apt to survive for too many credit cycles. But on-line lending is new to me, as it is to just about all of us. Maybe Avant has produced some sort of breakthrough innovation. Bloomberg Markets has some details:

 . . . Goldstein says his firm’s sophisticated algorithms identify people likely to make their payments, even when they’ve been rejected by another lender that relied on traditional credit scores. Of course, subprime mortgage lender Countrywide also used to tell investors that its proprietary technology would avoid foreclosures, a promise that didn’t last long once the financial crisis hit. (A spokeswoman for Avant says its technology has been vetted by best-in-class, external data science consultants and multiple equity investors.)

Ah! Sophisticated algorithms! Of course! What could go wrong?

I don’t doubt, actually, that superior loan-underwriting technologies and practices are out there waiting to be developed—perhaps Avant already has developed them!–that will allow lenders to provide credit more broadly and cheaply than now. The risk for online lenders such as Avant, though, is that the pressure they’ll face to grow quickly, in order to maintain their tech-like valuations, will be hard to resist. And even if their underwriting really is superior to incumbents’, I doubt it will be so much better that it will save fast-growing on-line lenders when the next crackup comes. It’s hard not to conclude that a lot of these companies, sooner or later, are accidents waiting to happen.

What do you think? Let me know!

4 Responses to “For On-Line Lenders, It’s Not the Algorithm, It’s the Growth Rate”

  1. JimBob

    Every algorithm looks like a winner in a low-risk credit market. It’s only under duress that the good ones emerge. The article also noted that their loss rates were 3x that of major credit card providers….in a good year! There will be blood when the economy starts to contract.

  2. Curmudgeon

    Saw that article yesterday and literally LOL’d when I read about the “best in class” data experts. Overall though, the article made me throw up a little in my mouth. And Mr Goldstein’s personal skin in the game? I’m betting very little.

  3. etoleary

    “Sophisticated algorithms” sounds like a euphemism for being unconstrained by the traditional benchmarks for underwriting credit such as “capacity” or “conditions” or “character.”

    There are occasionally new things but they should be added to the basics and not as a substitute for them. We’ll have to watch. Meanwhile, the pressure to grow will trump most anything else.

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