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We all admit that the future of financial technology companies is bright, but we can't ignore the fact that some financial technology companies are leading to declines because of the inability of entrepreneurs to control the company, especially lending platforms like Lending Club.
Excessive superstition of "yes"
Some technology-based online lending platforms don’t seem to realize their position, and they are almost willing to lend to any loan.
Set attitude. For example, if someone needs to borrow, the platform should care more about whether the person or business has a good credit risk, rather than the customer experience and the time it takes for the borrower to look up the assets.
LendingClub's official website claims that they have attracted up to $40,000 in personal loans and can “complete online applications in just a few minutes†and “finance loans in just a few daysâ€. Another well-known financial technology company, Funding Circle, claims that small businesses can get loans between $25,000 and $500,000 in 10 days.
These online lending platforms are designed to fill the gaps in previous credit markets and provide innovative services that enable those who are rejected by banks to obtain loans, thereby expanding the business landscape or repaying debts at lower interest rates. This starting point is good, but it is not the case when it actually runs.
Financial technology companies should learn more from the development experience of the banking industry, and the most important experience in this is to learn to say "no".
Those who forget history...
The credit cycle is the most important thing in the financial sector. When the economy is developing well, credit can expand at a high speed. However, when some emergencies occur, the credit cycle is difficult to sustain. For example, during the American Civil War, nearly 17,000 banks closed down.
Conversely, when the economy rises, the lending platform is prone to overconfidence. They constantly persuaded themselves and the people around them, this time the situation was different; but in the end they did not seem to be different, nor did they protect their institutions from default risk.
Warren Buffett called this an institutional force, which he defined as "when most companies take the same approach, whether it is stupid or not, the operator will unconsciously draw the gourd." In the early 1990s, many people believed that credit risk had passed, but then the credit cycle collapsed.
Situations like this have appeared on the historical stage again and again. In the 1980s, investment managers believed that the so-called portfolio had eliminated the risk of all stocks. But things became clear when people realized that portfolio insurance actually accelerated the market crash of October 19, 1987 - the so-called Black Monday.
The same was true before the 2008 financial crisis. Lending companies are convinced that mortgage-backed securities and asset swaps can effectively prevent the downturn in the real estate market. So they lend to everyone, regardless of their income, assets and credit history. Sure enough, we will all understand the following things.
That's why the best bankers, like JPMorgan Jamie Dimon, are obsessed with risk but remain humble in the credit cycle. “Everyone must assume that the business cycle will turn at any time,†Demmon said. “Every five years or so, you must assume that something bad will happen.
That's why investors and entrepreneurs should be vigilant when they hear that some fintech companies have hinted that they have permanently neutralized credit risk. Take the online online lending platform ZestFinance, they use the "Google-style algorithm" to make credit decisions:
This new technology consumes a lot of data and can more accurately identify borrowers - thereby providing lenders with higher repayment rates and providing consumers with lower-cost credit.
At ZestFinance, no one is involved in underwriting. Instead, rely on several mathematical models running in parallel to make a coverage decision. While many creditors may have to spend hours or even days making credit decisions, we can make accurate decisions in less than 10 seconds.
This overconfidence is not a good thing. Although ZestFinance may really control credit risk for the first time in a loan, there is no shortage of such cases in the history of loans.
Connect with reality
Credit should flow quickly and freely, but it must be reconciled with reality. The bank's main currency retail business, everyone wants to trade at the right time and at the right price. But when it comes to credit, this is not the case. It is more valuable and responsible to say "no" than to say "yes".
JPMorgan Duff McDonald wrote in his autobiography: "This is a well-known thing. The most difficult thing to run a business is to be able to say 'no', so that you can save limited resources and wait for the best opportunity. But over time As a result, most companies have gradually lost this golden rule.
Inefficiency is not necessarily a bad thing
Avoiding the above problems requires inefficiency, even if there is conscious and unconscious. As a result, financial technology companies (such as Lending Club, ZestFinance, etc.) need to fully consider credit cycle fluctuations before approving loans.
As early as more than a century ago, at the congressional hearing, John Pierpont Morgan, synonymous with JPMorgan Chase, was asked, “Whether commercial credit is based on money or property,†he replied, “No, the first thing is personality.†The judge continued to ask: “Before money or property?†Morgan replied: “Before money or property or anything else, and can’t buy it with money... because those who I don’t trust can’t get from me. I got a loan here."
But until now, financial technology entrepreneurs have rejected this outdated proposal. After all, the times are different. At the same time, we also have support for the Internet and big data.
“Because the modern credit system was founded in the 1950s, the world has changed dramatically,†ZestFinance claims. “Technology has changed, so credit should change.â€
But the truth is that credit has not changed, or at least not changed like some of the current statements. Technology can help complete the underwriting process, but it is not a panacea and cannot erase credit risk. More specifically, technology should not be seen as an alternative to what they consider to be inefficient, although fintech companies must struggle to survive the adverse changes in the credit cycle.
Avoid taking it for granted
ZestFinance was chosen as an example because it is the most open and representative, and the assessment of a person's assets has fundamentally changed to a technical assessment. In fact, many financial technology entrepreneurs have this attitude. They are top-notch in technology, but they don’t know much about credit risk. Of course, technology can solve everything.
The reason for this is because many financial technology entrepreneurs don't even understand what the financial crisis is. In the nearly two hundred and fifty years since the beginning of the eighteenth century, the United States experienced 14 financial crises. It is equivalent to a crisis every ten and a half years.
Another explanation is that financial technology entrepreneurs have a dogma that their personal capital is often isolated from the company's credit decisions, so they consider too little credit risk. Just like those fat cat bankers, or online lending platforms like LendingClub and Lending Tree, they just match creditors to debtors. The inherent vulnerability of this model has been repeatedly proven in the past. For example, in 1984, the Illinois mainland bank was the first bankruptcy “too big to fail†banks. There are also loan brokers like CountrywideFinancial that led to the 2008 financial crisis.
In his book Antifragile, Nassim Taleb pointed out that “the Romans have a habit, that is, engineers who build bridges must live under the bridges they build for a period of time to ensure the quality of the building – the same It should also apply to today's technical engineers."
All in all, it is a very dangerous behavior for financial technology companies to use an outdated excuse to refuse to reflect on hundreds of years of banking experience. Some consequences may not be apparent until the credit cycle gets worse. This may take many years, but if the situation worsens, companies that can learn from previous lessons will survive in chaos and become strong. .
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