March 14th, 2018 · Sadia Sarwar · Blockchain

Bank Lending is Broken, Here’s How to Fix It

The financial market is established, old-fashioned, and seeming almost impossible to disrupt. However, there are lots of things that are broken in the current financial system. One of them is lending.

Here is a closer examination of the problems with the current bank lending process, along with a proposed innovative solution.

The Current Bank Lending Process

The process of obtaining a loan requires a bank’s loan officer to complete a series of steps:

  1. Firstly, the loan officer checks a borrower’s credit score. The current credit scoring system assesses a borrower’s proclivity for debt repayment. Simply put, if a borrower is deemed to be “responsible” who takes care of his/her debt, then he/she could be viewed as a “safe” customer for the bank. A good credit rating would also mean that the bank would offer more favorable conditions of the loan to the borrower.
  2. Next, the loan officer checks a borrower’s loan eligibility. This means that the borrower needs to be have a viable income or a source of sufficient monetary funds to be able to repay the loan.
  3. In the case that the borrower doesn’t have a periodic income or a steady employment, he/she must share information about their assets (if any) with the loan officer. The loan officer will also look at these assets as possible collateral if the borrower chooses to secure the loan with a collateral.
  4. Lastly, the loan officer checks whether or not the borrower has a valid proof of status or residency claim to the country in which the loan is being processed. The borrower must also be of a certain age (at least older than 18 years).

Borrowers in turn must gather a bunch of paperwork to lay a claim to a loan with the bank. Borrowers typically need to provide copies of their driver’s licence or other state-issued IDs, proof of employment and income with pay stubs, bank account statements, tax returns and information about other loans or pertinent assets.

After all the necessary documents are submitted, the bank takes several business days to process an application, and then approve or reject the borrowers’ applications.

Why the Bank’s Lending Process is Broken

From the first glance, the above-described process seems reasonable and fairly straight-forward. But in reality, banks are flawed because they are privy to prejudices and biases. There are a number of “unwritten truths” that prove this claim and indicate that the current bank lending system is actually broken.

  • Banks like older people

Banks advertise the simplicity of their lending process – how a good credit score is good enough for a loan. Statistics collected by Value Penguin reveals something else however. It has been found out that banks only offer the lowest interest to those who have near-perfect credit scores (a FICO score between 720 and 850).

Attaining an optimum credit rating is usually not possible when borrowers are younger with fewer credit transactions to their name. Translation: baby boomers who have years of borrowing behind them get the best rates. Meanwhile, millennials and Gen Y’ers get the worst deals due to their younger age.

  • Banks offer better rates to the rich, regardless of loan amount

Credit scores are also artificially higher for older people who have more money. What this means is that a borrower’s credit score is not just a measure of his or her tendency to repay loans, but it also takes into account his or her income. This is unfair because a borrower’s loan capacity is a standalone measure.

Borrowing on a lower income means that the borrower should receive a lower amount (i.e. he/she has a lower loan capacity). The borrower’s lower income does not automatically make him more likely to default on a loan if his income can support said loan. A lower-income borrower should not be punished with unfair rates on a loan amount his income can support!

  • Banks’ loan approval system is contentious

Bank’s decision-making process is absolutely non-transparent. If rejected, borrowers are never given enough information about what went wrong with their applications. It could be something trivial as a red-flag on your private social media profile (or rather what the loan officer adjudicates to be a “red flag”). Loan officers are known to snoop on their borrowers, and although it might be nice to think that banks are thorough, they are also looking for the most minute reasons to reject borrowers.

Banks are also known to use their own metrics or statistics that may not or may not be scientifically proven to be accurate. The loan officer might notice that the borrower has similar spending patterns to people who defaulted on loans in the past. That could be ample reason enough to reject a loan. Or maybe the loan officer had found that the borrower’s CIBIL record contains too many loan applications. These loan applications could include store credit cards or other non-bank institutions with some form of financing capacity.

  • Banks prefer to squeeze their customers for profits

Last year, the average FICO score in the US was 699 and borrowers who have scores between 680 – 719 will get terms of 13.5% – 15.5%. This number seems outrageous given the fact that banks only pay borrowers back with less than 1 percent in interest through their savings accounts! This is not a win-win deal for regular people!

  • Banks don’t like entrepreneurs

Entrepreneurs are part-dreamers and part-risk takers. Thus, when these individuals approach the banks with ideas or an unstable income, the bank presses the big red button to sign off the alarm. Self-employed professionals receive the worse lending terms from banks, which is unfair because these individuals work hard and pay taxes like everybody else.  

  • Current banking is old-fashioned

Finance is still a very centralized industry. The high barriers to entry that the industry is safeguarded by means that banks have been immune to innovation for centuries. This is due to the fact that if there is no competition, there is no need for invention.

Using Blockchain to Fix the Current Lending System

To summarize the problems with the current bank lending system, it appears that banks have been able to get away with their bad behavior simply because they have had no competition from tech upstarts. The centralized nature of their industry is a big reason for bankers’ arrogance, that is why the world needs a new banking system.

This new banking system is made possible with the advent of decentralized financial applications built using blockchain technology. Many early blockchain adopter believe that blockchain-enabled cryptocurrencies will do what VoIP, Skype and WhatsApp did for the telecommunications industry.

The telecom industry had once been just as centralized and arrogant as the banking industry, yet it to fell to its knees when the right technology came about to reinvent it. That is why the cryptocurrency technology is so important for the finance industry: it the technology that is capable of changing it.

What We’re Doing At Celsius

At Celsius, we don’t want to discriminate against our borrowers. One of our mottos is to provide “crypto for the people” and we are resolved to solving the current bank lending process through two lending innovations:

  • A crowdsourced lending pool

Our Celsius Wallet will enable our borrowers to earn interest on their crypto holdings. When our members deposit their coins, they will join our decentralized lending pool that will then help them earn a daily interest.

  • Cash loans against crypto coins

At Celsius, our P2P lending platform is designed for the crypto community. It will help our members reap the benefits of the futures market and margin lending without the profits going to traditional financial institutions.

Stay tuned for the banking revolution!