There’s a common fallacy that computers – because they have no souls – turn down loan requests automatically, whereas bankers – some of whom may have souls – are more likely to look at all the facts and say “yes.” This myth popped up again last week, when SME business owners in Birmingham, UK, told the UK’s Parliamentary Commission on Banking Standards that banks need to end the “computer says no culture” that freezes lending. (“Computer says no,” by the way, is a reference to a recurring sketch on the comedy show Little Britain.)
Dumb computers, those that require prospective borrowers to tick a series of boxes in order to get a loan, may say no more often than people do. But smart computers, those relying on predictive analytics, don’t. In fact, they’re more likely to say “yes.”
Here are three good reasons why:
- Information overload. Predictive models that score loan applications weigh dozens or even hundreds of variables simultaneously. People can’t. In fact, studies show that the human brain can only hold seven to nine pieces of information in short-term memory at a time. If one or two of those pieces of information are negative, the human brain will likely view the application as negative (see point 3 below). Now that Big Data and stricter loan requirements have made more data available to analyze for each loan application, analytics have an even greater advantage over people.
- Data balancing. When predictive models are built, each piece of information is considered in combination with other pieces of information — this is multivariate analysis. Modelers make sure that a derogatory bit of data isn’t “double-counted” because of its impact on another bit of data. The human brain doesn’t have this capacity.
- No fear. People over-react to bad experiences — the phenomenon is known as negativity bias. So when lenders have had a run of losses, or have had a few borrowers default, they’re likely to view even healthy borrowers in a negative light. Predictive models can learn from experience, but because they don’t have feelings and emotions they don’t over-weight negative information.
This isn’t just theory. When FICO introduced the Small Business Scoring Service in the early 1990s, the banks that adopted it not only approved more loans, they approved them much faster.
That’s not to say people have no place in the loan approval process. Building a relationship is important for business owners and consumers, and people can consider data that the model isn’t built to analyze. But if borrowers really want a fair shot at credit, they should be glad those soulless computers are crunching away in the background.