Small businesses and financial institutions, including fintechs, can benefit from leveraging artificial intelligence technology like machine learning in making lending decisions, a white paper report commissioned by Uplinq, a credit assessment platform for small business lenders, found.

Together with using alternative data, adopting new technologies helps financial institutions offer advantages to their customers such as credit assessment and more efficient collections and loss mitigation, according to the white paper developed by Cornerstone Advisors, a management and technology consultancy for banks, credit unions, and fintechs.

“Data is noisy, and in other words, sometimes data is falsified. Sometimes, data is incomplete. Sometimes it’s not intentionally wrong; it’s just been reported incorrectly,” Patrick Reily, co-founder of Uplinq, told Banking Dive. “And so, the AI does a very good job of looking at the information integrity, and understanding when that information is reliable or when it may be suspect.”

But it is crucial to inspect and sort the data before utilizing it for underwriting purposes, he noted. The research shows that financial institutions that used Uplinq-based underwriting saw higher small business loan approvals among protected categories — up from 38% to 82%, according to the press release.

Banks and lending institutions nationwide are continually trying to streamline underwriting and loan processing methods through all the available digital and AI solutions “to stay competitive and on the cutting edge of customer experience,” Stephanie Dunn, head of SBA Lending, Grasshopper Bank, told Banking Dive via email.

“Innovation and soundness [are] every bank’s priority,” she noted. Adding that the “emphasis is now also both on the lending institutions and the small business owners combined to be as informed as possible given AI data is now so widely accessible. Knowledge is power as we all know and AI has allowed more widespread access to knowledge than ever before in history.”

Though AI can play an important role in providing affordable loans to small businesses, the white paper cites studies that say women and small business owners of color are often labeled “higher risk” and struggle to access credit from traditional lenders based on conventional underwriting criteria. This can push entrepreneurs to go for less advantageous funding sources like loans at higher rates from non-bank sources, according to the study.

Most traditional underwriting systems rely on human interactions, like people reading reports and making decisions. If they look at the same data repeatedly, humans sometimes fail to spot the discrepancies. Still, technology like AI stays put and helps differentiate between real and fake data, Reily pointed out. This helps to make lending decisions faster and reach more people, he said.

“You say, I’d like to ask for money, and then you have money in your bank account — that’s real empowerment. And so hopefully what it shows you is that fintechs can absolutely play in that space and they can exist in that space,” he noted. “Fintechs are always going to be challenged for cheap capital because they don’t get to take deposits. And so, they have to look at opportunities where the market will tolerate a higher interest rate or a higher cost structure. But as long as you’re focused on those segments, there’s room to play.”

Challenges in SMB lending

According to Dunn, the major gap that has long hindered accessing affordable loans is financial education. However, there is a proactive focus on providing loans to all businesses, including diverse markets across the country.

“Common barriers for SMBs across the country and more specifically in underserved communities include access to capital and how to efficiently bridge the business need with the bank’s actual loan products. The gap has always been and is still today, financial education,” Dunn noted.

But she pointed out that the lending landscape is very strong across various platforms, indicating that the “U.S. entrepreneurial spirit is active and thriving,” she said.

“Fintechs are challenged with finding streamlined processes in order to sustain their cost of funds. I would say both banks and fintechs are equally challenged with their respective efficiency metrics while maintaining credit quality and customer experience,” Dunn added.