Machine learning: Part of Europe’s consumer loans business

By Roger Baird on Tuesday 19 February 2019

Alternative Lending

This data technology is already widely used by finance professionals to work on consumer credit scores.

Machine learning technologies are widely used to establish consumer credit scores in Europe, a new report confirmed.

Around 70 per cent of financial institutions across the continent say they already use these data technologies to build consumer score cards, which dictate lending, said a survey called, Credit Risk Management 2019 - How Do You Stack Up?  

Financial businesses from small fintech start ups to banks as large as the UK’s Royal Bank of Scotland to America’s Citigroup increasingly use machine learning, or artificial intelligence, in a bid to boost revenues and cut costs that have risen markedly since the financial crisis.

These types of technologies are used in risk management to make lending approvals “a faster and more accurate loan acceptance process”, according to the report sponsored by Swedish credit and financial data fintech, Instantor.

Machine learning uses large swathes of “transactional data to identify patterns in customer behaviour”, the report says. Risk departments use this information to model default likelihoods in a bid to cut non-performing loans, and boost profitability.

However, the survey also found that a number of finance professionals are still unsure about the benefits of the technology.

It found that 44 per cent of those who did not use the system had “a lack of understanding of the potential impact of machine learning”. A further 22 per cent did not understand how these processes “could affect the company’s performance”.   

Former chairwoman of the UK’s Institute of Risk Management Nicola Crawford estimates that risk costs have jumped between 30 per cent and 50 per cent in the decade since the 2007 financial crisis.

The average coverage rate of non-performing loans in Europe was 46 per cent in 2018, according to the survey.

Some executives interviewed in the report added that comprehensive use of machine learning could slash credit decision times by as much as half, and cut losses on loans by up to 10 per cent.

This survey was distributed to 500 financial bodies, from digital lenders to traditional banks across 20 European markets including the UK, France, Germany, Croatia, Estonia and the Ukraine.

However, last week, a rival report said Big Tech firms are moving closer towards disrupting the finance industry, according to the financial industry’s global watchdog.

The Financial Stability Board (FSB) said huge players such as America’s Apple and Amazon, or China’s Alibaba, could potentially upend traditional banking models.

The FSB, which comprises the G-20’s central banks and supervisors, said these well-capitalised firms are already at the forefront of cutting-edge technology, artificial intelligence and machine learning, that financial firms only now developing.

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