27 Mar ‘Robo-advice’ could help banks predict creditworthiness
Robo-advisors are currently a prominent topic in fintech as they are disrupting the wealth management industry with their easy-to-use low-cost passive investment management service, which has grown in popularity amongst investors. However, ‘robo-advice’ is no longer just specific to the wealth management industry.
According to Diederick Van Thiel, co-founder of Dutch fintech company AdviceRobo, banks could also use ‘robo-advice’ to predict the creditworthiness of its customers, through the use of artificial intelligence and machine learning. This could be especially beneficial for challenger banks that tailor their services primarily towards millennials who may have limited credit history or no credit score at all. In this case, using the traditional model of assessing a customers credit risk, by taking into account 16 variables of structured data, would not be an effective way of predicting a customer’s credit risk. This is where ‘robo-advice’ can provide a solution as it can determine a customer’s creditworthiness by analysing over a thousand variables of unstructured data, such as the customer’s behaviour on social media, and thereby using a behavioural credit scoring model instead.
This service could also be valuable to large banks and insurers, as they tend to only analyse a small part of available customer data, while disregarding almost 80% of all available data. By incorporating the use of machine learning and artificial intelligence into their digital products, companies could be able to gauge their customers’ riskiness by their spending patterns, the amount of social connections they have, their travel behaviour, etc. This data, which is currently largely untouched by large financial institutions, shows clear patterns, which can be used to effectively determine a customer’s riskiness, according to AdviceRobo’s Van Thiel.
The future of ‘robo-advice’ in banking
‘Robo-advice’ in banking, however, will not stay limited to investing and assessing creditworthiness. The future of ‘robo-advice’ will most likely include a ‘virtual banking assistant’, which will automatically make financial decision for the customer, according to the customer’s previous behaviour. For example, a ‘virtual banking assistant’ may automatically decide, when money comes in, how much of it should be used to pay off debt or how much should be invested given the customer’s financial situation and spending patterns.
