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Can AI Transform Outdated (and Biased) Small Business Lending?

Happy interracial couple handshake bank manager take mortgage loan
Photo credit: fizkes - stock.adobe.com

A new research study from Cornerstone Advisors reveals that lenders’ outdated (and often biased) underwriting processes often consider women and small business owners of color to be “high risk,” which inhibits their access to reliable credit options. Insights are outlined in a white paper developed in partnership with Uplinq Financial Technologies, which also indicates that AI-powered underwriting can increase small business loan approvals among protected classes by more than 100%.

The white paper draws on expert insights from senior executives at Visa, the SME Finance Forum (which is part of The World Bank group), EY, Scotiabank and more to pinpoint the key barriers preventing small business owners, particularly in underserved communities, from accessing fair and affordable loans. The paper also reveals how a lack of access to credit for small businesses ultimately impacts macro and microeconomic factors.

When small businesses don’t have access to reasonably priced credit from trusted financial institutions, it can hinder economic expansion and discourage entrepreneurs from starting small businesses. This will ultimately hurt business equity and financial inclusion, especially among underserved groups. For example, the median net worth of Black women entrepreneurs is 10X greater than that of those who do not own equity. However, conventional underwriting criteria typically hurt their chances of getting access to reliable credit, so they either abandon their business ideas or ultimately rely on less advantageous or even predatory options such as higher-interest loans from non-bank sources.

Understanding the Power of AI

Machine learning and AI technology can help transform underwriting and automate decisioning in lending. By expanding the use of alternative data and adopting these technologies, financial institutions can improve credit assessment, ensure more efficient collections and mitigate loss. In fact, research shows that financial institutions deploying Uplinq-based underwriting more than doubled small business loan approvals among protected classes, from 38 to 82%.

“The path to fair and accessible small business lending is as much about transforming the culture at financial institutions as it is about overhauling technology and data,” said Ron Shevlin, Head of Research at Cornerstone Advisors in a statement. “Banks and credit unions must foster a culture conducive to innovation and developing sophisticated solutions to longstanding problems. Leaders at the helm of these institutions must act with conviction to educate and reskill, reinforce new practices, encourage problem-solving and inspire creative thinking to produce tech-enabled transformation.”

Can AI Transform Outdated (and Biased) Small Business Lending?

by | Feb 5, 2024

Happy interracial couple handshake bank manager take mortgage loan

A new research study from Cornerstone Advisors reveals that lenders’ outdated (and often biased) underwriting processes often consider women and small business owners of color to be “high risk,” which inhibits their access to reliable credit options. Insights are outlined in a white paper developed in partnership with Uplinq Financial Technologies, which also indicates that AI-powered underwriting can increase small business loan approvals among protected classes by more than 100%.

The white paper draws on expert insights from senior executives at Visa, the SME Finance Forum (which is part of The World Bank group), EY, Scotiabank and more to pinpoint the key barriers preventing small business owners, particularly in underserved communities, from accessing fair and affordable loans. The paper also reveals how a lack of access to credit for small businesses ultimately impacts macro and microeconomic factors.

When small businesses don’t have access to reasonably priced credit from trusted financial institutions, it can hinder economic expansion and discourage entrepreneurs from starting small businesses. This will ultimately hurt business equity and financial inclusion, especially among underserved groups. For example, the median net worth of Black women entrepreneurs is 10X greater than that of those who do not own equity. However, conventional underwriting criteria typically hurt their chances of getting access to reliable credit, so they either abandon their business ideas or ultimately rely on less advantageous or even predatory options such as higher-interest loans from non-bank sources.

Understanding the Power of AI

Machine learning and AI technology can help transform underwriting and automate decisioning in lending. By expanding the use of alternative data and adopting these technologies, financial institutions can improve credit assessment, ensure more efficient collections and mitigate loss. In fact, research shows that financial institutions deploying Uplinq-based underwriting more than doubled small business loan approvals among protected classes, from 38 to 82%.

“The path to fair and accessible small business lending is as much about transforming the culture at financial institutions as it is about overhauling technology and data,” said Ron Shevlin, Head of Research at Cornerstone Advisors in a statement. “Banks and credit unions must foster a culture conducive to innovation and developing sophisticated solutions to longstanding problems. Leaders at the helm of these institutions must act with conviction to educate and reskill, reinforce new practices, encourage problem-solving and inspire creative thinking to produce tech-enabled transformation.”