Forget FICO, 3 FinTechs that are disrupting consumer credit


Fintech companies – those that combine finance and technology – generated a lot of buzz in public markets during the pandemic. Although they have been around for a while, they are quickly becoming a part of everyday life. A study published in 2019 by Ernst & Young claimed that the global adoption rate climbed to 64% from just 16% in 2015. The pandemic has only reinforced this trend.

While the term can relate to many different aspects of our financial lives, one area that appears to be particularly vulnerable to disruption is consumer credit. After all, 1 in 5 people have an error in their credit report, according to a Federal Trade Commission study. Although Fair Isaac Corporation (FICO) and other major players have proposed changes, perhaps it is too little too late. That’s why we asked three Fool contributors which companies they are most interested in in the space. They offered Reached Holdings (NASDAQ: UPST), Mixed Laboratories (NYSE: BLND), and Rocket Companies (NYSE: RKT). Here’s why.

Image source: Getty Images.

The software eats the credit score

Jason Hawthorne (Upstart Holdings): Upstart has a 21st century approach to assessing credit risk. It uses machine learning and over 1,600 variables to make better decisions. This benefits both banks and borrowers. The company’s cloud platform sits in the middle, connecting the two groups. This means that it does not assume any risk of default from a traditional lender. Unlike some middlemen, the business actually adds value to the whole system. Approval rates are higher and interest rates lower, while still giving its banking partners access to people it could not have previously served.

Despite the complexity of artificial intelligence, the experience for a user is simpler. The company has consistently said that at least 70% of its loans each quarter are fully automated. It’s also the only fintech company to get the green light from the Consumer Financial Protection Bureau to make AI-based lending decisions. According to the agency, the Upstart platform leads to the approval of 27% more borrowers with an average lower interest rate of 16%.

As you can imagine, the banks are lining up. At the time of the Q1 earnings call, 18 banks and credit unions were using the platform. That’s up from 10 when the company went public at the end of 2020. For now, it is fueling decisions on personal loans. It is a market of 92 billion dollars according to TransUnion. It generates fantastic growth. In the first quarter, the company recorded a 90% growth in turnover thanks to a doubling of the volume of transactions.

Don’t expect this to slow down anytime soon. Upstart continues to upgrade its algorithm – as it has done for the past eight years – and purchased automotive software provider Prodigy in March. Its digital retail platform opens up $ 626 billion auto loan business for Upstart. Investors will be on the edge of their seats when Upstart releases its results on August 10. They will listen to any algorithm improvement, new customers and integration with Prodigy. In his short story, he blew up all the estimates. It may be necessary to continue for the stock to continue to climb.

Digitize the customer journey in banking

Keith Noonan (Blend Labs): Blend Labs’ mission is to simplify the world of consumer banking. The fintech company helps banks and financial institutions make their products easily accessible through online and mobile portals. The company already provides services to process data-driven loans beyond FICO credit scores, and its flexible cloud-based software platform could help financial institutions adapt to industry changes driven by fintech innovators.

Blend completed its IPO last month, and the stock got off to a bit of a rough start. The company’s stock price is down about 13% from day one close, with volatility in growth-dependent tech and financial spaces being the main catalyst for the pullback. However, investors with a buy-to-hold approach should not focus on volatility from the start. This is an innovative company run by a founder that could generate big profits.

Blend’s core business is helping established financial service providers modernize their offerings to be competitive in the digital age and provide flexibility that allows them to outperform a new wave of competition from fintech players and lenders. non-banking. The company has already built an impressive reputation in the mortgage processing service, and is now expanding its technology stack to facilitate growth in categories such as personal loans, checking accounts, home equity, mortgage loans, business loans and other areas. Blend Labs already averages over $ 5 billion in transactions per day and plans to expand into commercial banking as well.

By the end of 2020, 31 of the nation’s top 100 financial service providers were using the company’s technology to streamline mortgages, credit card consolidation and auto loans. As FinTech providers increasingly scrutinize non-FICO-based ratings and judge a larger pool of in-depth data sources to qualify services, Blend Labs could become pay-per-view to benefit from growing standards. credit and alternative lending instruments.

Rocket into the future

Eric Volkman (Rocket companies): There is nothing like being both disruptive and powerful. Say hello to Rocket Companies, the dual title parent company of not one but two well-known loan brands, Rocket Mortgage and Quicken Loans.

Currently, Rocket is the leading originator of home loans in the United States. One of the main reasons for this is its long-standing selling point: Those applying for a new mortgage or refinancing an existing one can do it entirely online (or, for those of us who just can’t tear ourselves away from it all). not to our smartphones, via the company’s app).

While we’re used to doing everything from grocery shopping to booking a car trip online, it’s helpful to remember that the mortgage industry remains stubbornly traditional in many ways. It’s still not uncommon for potential homebuyers to meet a banker in person and fill out tons of paperwork to secure their mortgage.

Rocket’s digital approach not only makes the process easier for the potential borrower, but also significantly reduces the drain on company resources. After all, with a solid electronic foundation, you don’t need to have a large army of flesh-and-blood loan officers earning commissions.

Another reason Rocket has such reach and importance in mortgage lending is that it actively sells the loans it has issued to third party investors in the secondary market. If the borrower defaults, Rocket doesn’t hold the bag. This is a constant concern that traditional mortgage lenders have had to live with for many decades.

As a company, Rocket is in the right place at the right time in history. US interest rates are historically and consistently low today. This means cheaper mortgages, of course, and therefore higher consumer demand. In its most recent quarter, the company’s revenue grew by almost 54%, a monster jump from all points of view.

For homebuyers who believe that strong U.S. housing demand will persist, Rocket is a stock to consider. This mortgage market disruptor is likely to get even stronger and more disruptive, and soon.

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Eric Volkman has no position in the stocks mentioned. Jason Hawthorne owns shares of Upstart Holdings, Inc. Keith Noonan has no position in any of the shares mentioned. The Motley Fool owns stock and recommends Upstart Holdings, Inc. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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