Artificial intelligence has become deeply integrated in everyday life—from people telling their virtual assistant to play music or using a map app to navigate to a new restaurant. Financial institutions are also embracing AI to meet consumers’ expectations with the top application being personalized 24/7 customer service.[i]

Unsurprisingly, big banks are leading the global race to transform banking into an AI-first industry. For example, J.P. Morgan Chase leads in AI research and is rapidly hiring AI talent, Capital One leads in AI patents, and banks are investing in AI startups.[ii] Additionally, the AI chatbot, ChatGPT, which has exploded in traffic with more than 100 million users as of July 2023, is revolutionizing the banking sector with its ability to process vast amounts of data and offer personalized investment advice.[iii]

Today’s lenders are pursuing increased value with AI and machine learning to improve underwriting and better assess and predict loan risks. As a result, credit unions have the opportunity to tap into AI’s potential to better predict risk outside of overreliance on traditional credit scores. So, how can credit unions with much smaller budgets and teams compete with the trillionaire banks during this rapidly evolving wave of AI?

How AI is Transforming Lending

Access to credit has long been a determining factor in whether or not the average person can achieve the American Dream. However, the traditional scorecard methods used for decades have limited ability to accurately quantify risk.

AI improves lending through all phases – it can analyze data for accurate risk assessment, reduce bias, automate tasks and personalize the lending experience for improved credit scoring. AI-based credit decisioning can also easily handle large volumes of data from a wider variety of sources than traditional ones to identify patterns and trends that humans might miss. With AI’s ability to build predictive models to assess the likelihood of a borrower defaulting on a loan, credit unions can make more accurate predictions about a borrower’s creditworthiness.[iv] In fact, with Upstart, 87 percent of applicants are approved verified without having to submit additional documents.

Enabling more inclusive lending

One other benefit of an advanced, AI-powered underwriting system is that it ensures objectivity and fairness compared to oftentimes subjective, human-led decisioning. With Upstart AI, lenders can approve more borrowers at lower rates across races, ages, and genders, while delivering the exceptional digital-first experience customers demand. When underserved borrowers who would have been declined by a traditional lender apply for a loan from an Upstart lending partner, their repayment trains Upstart’s machine learning models to help drive more approvals for future “hidden prime” applicants.

Gaining members for life

AI also unlocks the potential for long-term membership growth and relationship development. Not only does AI have the capacity to approve more borrowers–Upstart-powered loans, for example, are originated using the credit union’s loan documents so credit union partners gain a member to cross-sell new members over time. In fact, Upstart’s API enables credit unions to board members directly to their core system to immediately have new member and loan information available for long-term relationship building. In addition, credit unions can promote additional products or services, at no additional cost, during the online loan origination process via the Upstart Referral Network.

Lending partners such as Commonwealth Credit Union have seen success cross-selling these new members for growth–7.8 percent of Commonwealth Credit Union’s members gained from Upstart are cross-sold additional products, including checking and savings accounts, credit cards, home equity loans and auto loans.

Streamlining Compliance & Risk

By working with the right AI partner, credit unions can ensure compliance from both the customer and regulator viewpoints. AI enables credit unions to perform customer due diligence, such as collecting relevant information and verifying identity, with greater efficiency. Also, regulator examinations become less time-consuming with AI’s ability to organize vast sets of data, reports and documents.

Upstart has established compliance and risk programs that leverage AI to help credit unions prepare for annual examinations from both state and federal regulators. Lending partners are offered a significant amount of program configurability–they can specify the credit box, risk tolerance and geographic focus for their lending programs. To support credit unions’ safety and soundness goals, Upstart’s experienced professionals provide ongoing oversight and proactively share insights with their lending partners.

Go from Zero to Hero with an AI Expert

Upstart has worked as a consultative partner with more than 100 banks and credit unions[v] as they embark on their AI journey to drive higher returns and grow new members in the process.

Credit unions like Alliant and Vantage West have partnered with Upstart to reinvest their run-off from low yield, long-duration assets into short-duration, personal loans yielding an average of 8.6 percent returns (net of losses and fees).[vi] At the same time, our partners gain new members that they can cultivate for long-term value.

Upstart-powered loans have performed exceptionally, with loss rates at or below targets set by our lending partners, even in the current macro climate.

With the right fintech partner, credit unions can kickstart their AI journey affordably and compliantly while maximizing value throughout their business operations. Upstart enables credit unions to diversify their portfolios with short-term, high-yield assets by offering new lending services and products. In turn, this helps retain existing members and also acquire new ones, who are attracted by the digitized process and wider range of financial offerings.

If you would like to learn more about how Upstart can help your credit union develop its 2024 AI strategy, visit https://www.upstart.com/lenders.

[i] https://www.insiderintelligence.com/insights/ai-in-finance/

[ii] https://www.axios.com/2023/08/02/american-banks-ai-transformation-race

[iii] https://explodingtopics.com/blog/chatgpt-users

[iv] https://cointelegraph.com/news/how-can-ai-be-used-to-improve-credit-scoring

[v] As of 8/7/2023

[vi] Average returns are taken from July-September 2023