You Ain't Seen Nothing Yet
Technology's influence on banking and the housing market has only just begun
Nothin’ yet, you ain’t been around
That’s what they told me
-Bachman-Turner Overdrive, 1974
Roslyn Place, Pittsburgh, PA’s last wooden street
The housing sector has got a lot of attention this month - Rocket Companies, the parent company of Quicken Loans and the largest mortgage originator in the U.S., took itself public in a highly publicized IPO that valued the company at nearly $40 billion; mortgage interest rates creeped up towards 3%; monthly housing construction starts jumped over 23% from last year; and home sales jumped nearly 25% over last year with the median price of a home jumping to $304,000. But for all the attention, most consumers are not aware of a related industry trend whose growth may have a larger impact on their homebuying experience.
‘FinTech’ has become a catchall term that is used to describe companies operating at the convergence of financial services and technology. It is often used to describe payment processors like Square or PayPal, but it also applies to lending companies like SoFi which are upending how loans are evaluated and processed in order to streamline student loan refinancing for consumers. Getting into even more specific subsectors, there are companies like Credifi which tracks data in the commercial real estate sector for lenders and investors.
But looking at FinTech as a separate industry from financial services understates the impact that technology is having on lending and the banking system. FinTech is more of a trend than a separate line of business. Last week American Express bought FinTech startup Kabbage, an online small business lender which provides loans of up to $250,000 through an automated platform, for a rumored $850 million. In their press release, AmEx noted how the acquisition would provide customers with real-time cash management and lending data, but doesn’t that also mean real-time information is available to AmEx?
That kind of deep data may not raise a lot of eyebrows at businesses, but the implication is that financial services companies are exponentially increasing the insights they have on individual consumers and their habits. Rather than basing lending decisions on typical factors like income, credit scores, and borrowing history, lenders now have the option to comb this additional data and search for statistical patterns impacting their decisions which consumers may not be aware of, understand, or even control. Will consumers notice this newfound level of information-sharing, or will they simply accept it in the same way they have chosen to share their data with advertisers through social media platforms?
The Equal Credit Opportunity Act, which restricts lenders from discriminating on the basis of age, race, or marital status, or receipt of public assistance among other factors, was enacted in 1974, decades before we could imagine the ability of automated decision systems to evaluate loan applicants. But these standards could be rendered useless if programmers (whether intentionally or unintentionally) incorporate variables that imply these categories - for example, if consumers who purchase hearing aids and listen to 1960s music are less creditworthy than a general audience, could that be interpreted as a de facto form of age discrimination? The bottom line is that, when it comes to how FinTech and big data will impact credit decisions, we ain’t seen nothing yet.