Underwriting is at the very heart of the credit business. Gathering and analyzing information about a person or business to determine whether to offer credit and on what terms is arguably the central craft in all of finance. Given its importance, and the tendency of new entrants to underplay risk as they rush to grow market share, it is understandable that veterans in the lending business are skeptical about innovations in underwriting.
As discussed in the first article in this series, much of what characterizes a good lending business has not changed, but some things certainly have. In this piece we’ll look at what some of the most sophisticated small business lenders and “fintechs” are doing in this area, and map out how a lender looking to achieve the best possible efficiency and effectiveness in underwriting might approach this challenge.
New data sources
The first task of an underwriter – human or machine – is to gather and verify all pertinent information about a loan applicant.