Can Rejection Rates be Lowered via Referral?

A digital loan exchange has launched in the US with a view to streamlining the functionality of the alternative lending ecosystem.

Cloud Lending Solutions is a technology platform that is automating decision-making for financial institutions of various shapes and sizes via the cloud. The company has just launched Cloud Lending Exchange (CLE) – a bounce-point for rejected consumer loans.

Not so long ago in the US, the FICO score of a prospective borrower was just about the only factor in determining his or her suitability. But now we’re seeing an increasing number of providers turn to non-traditional data sources in order to support lending decisions. The likes of SoFi and Upstart in the US, for instance, both cater to young professionals who lack an established credit history by focusing instead on such metrics as earning potential.

But in spite of this, Snehal Fulzele, CEO of Cloud Lending Solutions, perceives a marked and pervasive disconnect between the underwriting criteria of alternative lenders and borrower demand. The CLE boss pointed to the fact that on Prosper – one of the world’s largest and most rapidly growing P2P platforms – somewhere in the region of 90% of loan applications are rejected. 

Can it really be the case that 9 in 10 borrowers are unworthy of credit? For Snehal, the answer is a resounding no. And the solution is Cloud Lending Exchange:

“Most of these loan applications are not approved because of some other criteria that these lenders have in place such as term, concentration in the portfolio (geography, asset class), loan size, type of loan, or even regulatory constraints. The loans don’t fit that lender’s credit box. It’s an issue of credit box vs. credit score.

Once we realized conventional wisdom had overlooked that important distinction, we innovated fast.”

The idea is simple: an online platform that allows financial institutions to share the loan applications that they’re unable to fund. Those applications may then be bid upon by the host of financial institutions that are plugged into the portal. The “currency”, if you will, is the interest rate on offer – the hope being that competition within the exchange should serve to drive down the cost of finance. I quizzed Snehal on whether he might consider integrating other forms of competitive advantage into the marketplace. Speed of access, after all, has often been cited by borrowers (via various surveys and studies) as equally if not more important than price. He conceded that CLE will have to investigate that angle.

There are clear comparisons between what Cloud Lending Exchange is setting out to achieve and the efforts of the many “finance platforms” based here in the UK. By “finance platforms”, I refer to the matchmaking portals that connect stray SME borrowers with alternative finance providers. The first of these – “Alternative Business Funding” (ABF) – in fact began life as an exclusively SME loan-oriented version of Cloud Lending Exchange: a digital basin into which 7 alternative finance providers could dump and scoop up loan applications.

ABF is in the running for "designated point of referral" status under the mandatory bank referral scheme. But much like its many UK competitors, ABF will also be looking to carve out fresh origination channels of its own. Snehal suggested that, in time, this too may be an avenue that Cloud Lending Exchange looks to explore.

For now though, the focus will be on financing rejected loan applications. Snehal was keen to labour the point that these are not simply loan leads, but complete loan applications. The actual originator of the application will earn itself a referral fee for directing a prospective borrower towards the exchange. Such kickbacks help lending businesses to drive down their acquisition costs, in that unsuitable loan opportunities may nonetheless prove to be revenue generating. More importantly, the presence of Cloud Lending Exchange means that alternative lenders needn’t give borrowers a flat rejection. The capacity to work with borrowers towards a successful resolution may work wonders in terms of relationship building and customer care.

CLE is by no means moving in a vacuum. There are various forms of borrower-facing alternative lending intermediaries in the States. Lendio, for example, is an SME loans facilitator that allows a range of alternative lenders to bid on borrowing requests via a sophisticated technology interface. The platform has a partnership in place with Staples (the stationery giant) and is offering access-to-credit assistance to its millions of SME clients. Lendio and other varieties of intermediary in the US may well choose to turn their attentions to the consumer space in time.

We’ll keep a watchful eye on the progress of Cloud Lending Exchange, and indeed on the quoted rejection rate of 90% amongst the likes of Lending Club and Prosper; a rate which CLE hopes to bring tumbling down.