On the Dark Side of Automation: Borrowers Will be Affected but Marketplace Lending is a Potential Bright Spot

As lenders lean on data, algorithms and automation for more efficient loan underwriting, observers have noted that these largely untested tools have yet to go through an economic cycle. The greatest challenge for automated lending, however, may lie in the very technology that drives it. Artificial intelligence and automation aren’t just for lenders, after all—and as companies across industries adopt them in the coming years, the impact on borrowers’ economic stability could be severe.  But online lenders, with their fast-moving, adaptable techniques, may be in the best position to respond to these market changes. Their flexibility and responsiveness may put them far ahead of their more traditional lending rivals.

It’s well established that automation, far more than international trade, is responsible for decimating manufacturing jobs in America. But now automation is making in-roads in other areas, and job losses are likely to follow. Transportation is an immediate space of concern given the energy being devoted to the development of self-driving automobiles and particularly self-driving commercial long-haul vehicles. Retail jobs also appear vulnerable. A McKinsey study suggested that 53% of retailing activities are automatable. We’ve already seen major cuts to retail jobs in 2017, which continues a trend ushered in by consumer acceptance of online shopping. As CNN Money reported, job losses at traditional department stores over the last fifteen years fell 46%, far outpacing losses in coal mining and factory jobs.

The Obama Administration produced a study predicting that the jobs most at risk due to automation in the immediate future will be lower-wage positions. There are some market observers, however, who think that higher-skilled, higher-educated employees are also likely to feel this pinch. The point, as made by an MIT economist, is that the spread of automation beyond manufacturing has been broad. AI, robots, and automation have pushed into “various industries, including auto manufacturing, metal products, pharmaceuticals, food service, and warehouses.” Even, yes, loan underwriting.

As we try to imagine the effect of automation on the workforce, McKinsey has cautioned against thinking about its impact on particular “occupations,” but rather thinking of the potential impact on “activities.” Its conclusion: nearly half of work activities could be automated using already-existing technology.

If you felt some anxiety when reading that, you aren’t alone. There is a prevalent concern that automation and AI displaces workers in a fundamentally different way than previous waves of technological advancement. Those may have eliminated isolated jobs in isolated industries, but left affected workers able to move into other sectors for similar work. AI and automation. meanwhile, have the potential to wipe out entire job functions across all economic sectors, leaving displaced workers nowhere to go. This threat is only enhanced by the ability of employers to adopt technological changes much more quickly today—through, for instance, near-instantaneous software updates.

The potential impact on consumer lending could be severe, further exacerbating our already significant income inequality. As with the mortgage crisis, there is also the potential for some regions to be hit harder than others depending on their dominant industries and labor pools.  As technology advances accelerate, and jobs are eliminated, long-term loans will be most vulnerable, resulting in higher risk premiums and greater cost to borrowers, which in turn, could create even more risk for lenders and investors.

Marketplace lenders have gone through a rough patch recently, but with their embrace of new technology, “big data,” and efficiency, they may be in a better position than traditional lenders to adjust their automated practices to account for the fact that their borrowers’ employment could be disrupted within the next decade.  Their tools and machine learning may even provide insight into trends before they are readily apparent to traditional lenders.

Another advantage for online lenders:  They attract tech-savvy borrowers.  As traditional jobs are eliminated, these borrowers may be better able to navigate advances in technology and automation and find new work.  If so, the greater employment resiliency of the online borrower could improve the performance of marketplace lenders and increase the desirability of marketplace loans for investors.

Massimo Giugliano, an associate in the Insolvency, Creditors’ Rights & Financial Products Practice Group of Davis & Gilbert, contributed to this post.