Fintech

Lawsuit, subpoena, ask fintechs to revisit AI

Published

11 months ago

29 May, 2024

Lawsuit, subpoena, ask fintechs to revisit AI

The Navy Federal class action lawsuit has led financial institutions to review their fair lending practices and consider how artificial intelligence fits in. For Amount’s director of decision science, Garrett Laird, the conversation is nuanced.

Second CNNNavy Federal’s nearly 29-point gap in approval rates was the widest among the top 50 mutual lenders in 2022. It persisted when taking into account the applicant’s income, debt-to-income ratio, property value and down payment percentage.

Garrett Laird said there are many considerations fintechs and credit unions need to take into account before implementing AI.

The disparity in homeownership is greater than it was in 1960. A white family is 55% more likely to own a home than a Hispanic family and 70% more likely than a black family. Thanks to the power of homeownership, the average median wealth for a white household is $285,000, $61,600 for a Hispanic household, and $44,900 for a black household.

Questions raced through Laird’s mind when he heard the news from the Federal Navy. What was their underwriting process like? Was it more subjective or systematic? Has a systematic policy led to disparities? What controls were in place to prevent this? Whatever the reason, this is a significant failure, given the stark differences in advertised approval rates.

“At Amount, we pride ourselves on automating decisions, making them easier and faster,” Laird said. One of the benefits is greater control. You can remove human biases to some extent. There may still be biases in datasets, policies and algorithms, but they can be measured empirically. There you don’t have to worry so much about the human aspect.”

“I want to know what these controls and processes look like at Navy Federal and how they got to where they are. Hopefully some of this will become public knowledge.”

Most financial institutions still rely, to some extent, on the human element. Laird said they like to keep a manual option, say, for a longtime customer. The danger comes if such exceptions are used for some groups more than others.

Artificial intelligence and fintech represent huge opportunities for credit unions

Automated decision making is becoming more and more widespread. That’s one reason Laird is excited about Amount’s partnership with Velera (formerly PSCU/Co-op Solutions). The amount supports Origination Solutions, Velera’s new digital lending suite.

Smaller credit unions and community banks have different mandates than larger institutions. They exist to meet the needs of their members. They are good at building relationships but need help with automated scoring. Add that automation while maintaining the personal touch and there are huge opportunities.

Credit unions offer a much broader range of services than fintechs, which leverage more modern technologies. When the two are combined, credit union members can benefit from a variety of tailored opportunities.

Separate the different types of AI

Laird warns leaders to be careful about using artificial intelligence. Yes, there are clear reasons for more efficient document processing and data extraction. However, the fervor against large language models is misplaced because they lack explainability.

“There is absolutely interest in AI for lending, but different types of AI,” Laird said. Logistic regression has been around for decades but it still works and adds a lot of value.

“We’ve seen this with other customers using these models. For a fintech lender, I know they are using more advanced algorithms for underwriting decisions. They have become comfortable with their ability to explain these findings and are moving forward in doing so. So there is still movement in that space.”

Laird believes credit unions and community banks are more interested in traditional machine learning techniques that are explainable.

Linear’s acquisition of Amount will soon bear fruit

In 2022, Amount acquired an SME lending and account creation platform, Linear, for $175 million. The deal creates a company with strengths in commercial and consumer services.

Laird said the last 18 months have been spent combining the two companies. Once completed, customers will benefit from a wider range of products that can be offered when they need them. Perhaps a commercial loan applicant needs a checking account for a small business, or a consumer borrower would benefit from a credit card or refinance.

“Having all of this together in one place is exciting,” Laird admitted.

More and more customers are looking for proactive advice. Laird said this fosters the elusive stickiness that every institution aspires to.

The advantages of open banking

The advent of open banking is significant, as Laird sees it as helping him better serve customers in their time of need. He also forces serious institutions to be more proactive, especially with their data, because if they don’t, someone else will.

“I think it’s going to be a really good thing for consumers,” Laird said.

Why the SEC’s Upstart Subpoena Matters

Laird said the outcome of the SEC’s subpoena into Upstart’s models and lending will have a crucial impact on fintech’s use of artificial intelligence and the role of explainability. If Upstart gets the green light, all will be well. If complications arise, many companies will review their plans.

This would be a shame, as many current assessment methods perpetuate disparities. As soon as the FICO score drops to 660 or lower, customer offers quickly deteriorate.

“There is no difference between a 661 and a 659 other than being labeled prime,” Laird said. “The typical banking industry is taking a step back and refusing to engage with that customer base. They don’t give them loans, or if they give them credit cards, they’re not the same credit cards that a primary customer gets.

“It becomes a self-fulfilling prophecy: anyone below that threshold is more likely to default. This has allowed fintechs to exist, gobbling up market share that banks were unwilling to touch, but it also has negative outcomes for customers.”

Tony is a long-time contributor in the fintech and alt-fi spaces. Twice named journalist of the year at LendIt e winner in 2018, Tony has written more than 2,000 original articles on blockchain, peer-to-peer lending, crowdfunding, and emerging technologies over the past seven years. He has hosted panels at LendIt, the CfPA Summit, and DECENT’s Unchained, a blockchain expo in Hong Kong. Email Tony here.

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Fintech

US Agencies Request Information on Bank-Fintech Dealings

Published

9 months ago

30 July, 2024

FinCrypt Staff

Federal banking regulators have issued a statement reminding banks of the potential risks associated with third-party arrangements to provide bank deposit products and services.

The agencies support responsible innovation and banks that engage in these arrangements in a safe and fair manner and in compliance with applicable law. While these arrangements may offer benefits, supervisory experience has identified a number of safety and soundness, compliance, and consumer concerns with the management of these arrangements. The statement details potential risks and provides examples of effective risk management practices for these arrangements. Additionally, the statement reminds banks of existing legal requirements, guidance, and related resources and provides insights that the agencies have gained through their oversight. The statement does not establish new supervisory expectations.

Separately, the agencies requested additional information on a broad range of arrangements between banks and fintechs, including for deposit, payment, and lending products and services. The agencies are seeking input on the nature and implications of arrangements between banks and fintechs and effective risk management practices.

The agencies are considering whether to take additional steps to ensure that banks effectively manage the risks associated with these different types of arrangements.

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Fintech

What changes in financial regulation have impacted the development of financial technology?

Published

9 months ago

30 July, 2024

FinCrypt Staff

Exploring the complex landscape of global financial regulation, we gather insights from leading fintech leaders, including CEOs and finance experts. From the game-changing impact of PSD2 to the significant role of GDPR in data security, explore the four key regulatory changes that have reshaped fintech development, answering the question: “What changes in financial regulation have impacted fintech development?”

PSD2 revolutionizes access to financial technology
GDPR Improves Fintech Data Privacy
Regulatory Sandboxes Drive Fintech Innovation
GDPR Impacts Fintech Data Security

PSD2 revolutionizes access to financial technology

When it comes to regulatory impact on fintech development, nothing comes close to PSD2. This EU regulation has created a new level playing field for market players of all sizes, from fintech startups to established banks. It has had a ripple effect on other markets around the world, inspiring similar regulatory frameworks and driving global innovation in fintech.

The Payment Services Directive (PSD2), the EU law in force since 2018, has revolutionized the fintech industry by requiring banks to provide third-party payment providers (TPPs) with access to payment services and customer account information via open APIs. This has democratized access to financial data, fostering the development of personalized financial instruments and seamless payment solutions. Advanced security measures such as Strong Customer Authentication (SCA) have increased consumer trust, pushing both fintech companies and traditional banks to innovate and collaborate more effectively, resulting in a dynamic and consumer-friendly financial ecosystem.

The impact of PSD2 has extended beyond the EU, inspiring similar regulations around the world. Countries such as the UK, Australia and Canada have launched their own open banking initiatives, spurred by the benefits seen in the EU. PSD2 has highlighted the benefits of open banking, also prompting US financial institutions and fintech companies to explore similar initiatives voluntarily.

This has led to a global wave of fintech innovation, with financial institutions and fintech companies offering more integrated, personalized and secure services. The EU’s leadership in open banking through PSD2 has set a global standard, promoting regulatory harmonization and fostering an interconnected and innovative global financial ecosystem.

Looking ahead, the EU’s PSD3 proposals and Financial Data Access (FIDA) regulations promise to further advance open banking. PSD3 aims to refine and build on PSD2, with a focus on improving transaction security, fraud prevention, and integration between banks and TPPs. FIDA will expand data sharing beyond payment accounts to include areas such as insurance and investments, paving the way for more comprehensive financial products and services.

These developments are set to further enhance connectivity, efficiency and innovation in financial services, cementing open banking as a key component of the global financial infrastructure.

Sebastian Malczyk

General Manager, Technology and Product Consultant Fintech, Insurtech, Miquido

GDPR Improves Fintech Data Privacy

Privacy and data protection have been taken to another level by the General Data Protection Regulation (GDPR), forcing fintech companies to tighten their data management. In compliance with the GDPR, organizations must ensure that personal data is processed fairly, transparently, and securely.

This has led to increased innovation in fintech towards technologies such as encryption and anonymization for data protection. GDPR was described as a top priority in the data protection strategies of 92% of US-based companies surveyed by PwC.

Arid Islam

Financial Expert, Sterlinx Global

Regulatory Sandboxes Drive Fintech Innovation

Since the UK’s Financial Conduct Authority (FCA) pioneered sandbox regulatory frameworks in 2016 to enable fintech startups to explore new products and services, similar frameworks have been introduced in other countries.

This has reduced the “crippling effect on innovation” caused by a “one size fits all” regulatory approach, which would also require machines to be built to complete regulatory compliance before any testing. Successful applications within sandboxes give regulators the confidence to move forward and address gaps in laws, regulations, or supervisory approaches. This has led to widespread adoption of new technologies and business models and helped channel private sector dynamism, while keeping consumers protected and imposing appropriate regulatory requirements.

George Blandford

Co-founder, UK Linkology

GDPR Impacts Fintech Data Security

A big change in financial regulations that has had a real impact on fintech is the 2018 EU General Data Protection Regulation (GDPR). I have seen how GDPR has pushed us to focus more on user privacy and data security.

GDPR means we have to handle personal data much more carefully. At Leverage, we have had to step up our game to meet these new rules. We have improved our data encryption and started doing regular security audits. It was a little tricky at first, but it has made our systems much more secure.

For example, we’ve added features that give users more control over their data, like simple consent tools and clear privacy notices. These changes have helped us comply with GDPR and made our customers feel more confident in how we handle their information.

I believe that GDPR has made fintech companies, including us at Leverage, more transparent and secure. It has helped build trust with our users, showing them that we take data protection seriously.

Dr. Rhett Stubbendeck

CEO & Co-Founder, Leverage Planning

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Fintech

M2P Fintech About to Raise $80M

Published

9 months ago

30 July, 2024

FinCrypt Staff

Application Programming Interface (API) Infrastructure Platform M2P Financial Technology has reached the final round to raise $80 million, at a valuation of $900 million.

Specifically, M2P Fintech, formerly known as Yap, is closing a new funding round involving new and existing investors, according to entrackr.com. The India-based company, which last raised funding two and a half years ago, previously secured $56 million in a round led by Insight Partners, earning a post-money valuation of $650 million.

A source indicated that M2P Fintech is ready to raise $80 million in this new funding round, led by a new investor. Existing backers, including Insight Partners, are also expected to participate. The new funding is expected to go toward enhancing the company’s technology infrastructure and driving growth in domestic and international markets.

What does M2P Fintech do?

M2P Fintech’s API platform enables businesses to provide branded financial services through partnerships with fintech companies while maintaining regulatory compliance. In addition to its operations in India, the company is active in Nepal, UAE, Australia, New Zealand, Philippines, Bahrain, Egypt, and many other countries.

Another source revealed that M2P Fintech’s valuation in this funding round is expected to be between USD 880 million and USD 900 million (post-money). The company has reportedly received a term sheet and the deal is expected to be publicly announced soon. The Tiger Global-backed company has acquired six companies to date, including Goals101, Syntizen, and BSG ITSOFT, to enhance its service offerings.

According to TheKredible, Beenext is the company’s largest shareholder with over 13% ownership, while the co-founders collectively own 34% of the company. Although M2P Fintech has yet to release its FY24 financials, it has reported a significant increase in operating revenue. However, this growth has also been accompanied by a substantial increase in losses.

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Fintech

Scottish financial technology firm Aveni secures £11m to expand AI offering

Published

9 months ago

30 July, 2024

FinCrypt Staff

Aveni, Investment Management, AI, NLP, UK

By Gloria Methri

Today

To come
Aveni Assistance
Aveni Detection

Artificial intelligence Financial Technology Aveni has announced one of the largest Series A investments in a Scottish company this year, amounting to £11 million. The investment is led by Puma Private Equity with participation from Par Equity, Lloyds Banking Group and Nationwide.

Aveni combines AI expertise with extensive financial services experience to create large language models (LLMs) and AI products designed specifically for the financial services industry. It is trusted by some of the UK’s leading financial services firms. It has seen significant business growth over the past two years through its conformity and productivity solutions, Aveni Detect and Aveni Assist.

This investment will enable Aveni to build on the success of its existing products, further consolidate its presence in the sector and introduce advanced technologies through FinLLM, a large-scale language model specifically for financial services.

FinLLM is being developed in partnership with new investors Lloyds Banking Group and Nationwide. It is a large, industry-aligned language model that aims to set the standard for transparent, responsible and ethical adoption of generative AI in UK financial services.

Following the investment, the team developing the FinLLM will be based at the Edinburgh Futures Institute, in a state-of-the-art facility.

Joseph Twigg, CEO of Aveniexplained, “The financial services industry doesn’t need AI models that can quote Shakespeare; it needs AI models that deliver transparency, trust, and most importantly, fairness. The way to achieve this is to develop small, highly tuned language models, trained on financial services data, and reviewed by financial services experts for specific financial services use cases. Generative AI is the most significant technological evolution of our generation, and we are in the early stages of adoption. This represents a significant opportunity for Aveni and our partners. The goal with FinLLM is to set a new standard for the controlled, responsible, and ethical adoption of generative AI, outperforming all other generic models in our select financial services use cases.”