I am looking for additional insight with regard to how changes in the financial services industry over the next decade might impact stakeholder relationships an organization has with financial institutions. I'm not looking for anything too involved, perhaps a couple of paragraphs. Thank you for your assistance.© BrainMass Inc. brainmass.com December 19, 2018, 8:41 pm ad1c9bdddf
HOW THE CHANGES IN THE FINANCIAL SERVICES INDUSTRY MIGHT IMPACT THE RELATIONSHIP AN ORGANIZATION HAS WITH FINANCIAL INSTITUTIONS
One of the most dramatic changes in small business lending has been the adoption of credit
scoring for marketing and underwriting many small business loans. The transaction costs of
Traditional relationship lending meant that making small loans did not meet the profitability targets of some large banks. Conversely, small banks had traditional informational advantages, were closer to the customer, and were often more interested in small loans. Credit scoring for small business loans has turned this dynamic on its head. Because credit scoring is used for smaller loans, its increased adoption by larger banks has led to a substantial increase in the number of loans under $100,000 made by large institutions.
Whether credit scoring will benefit or harm firms in central cities and lower-income areas is
not entirely clear, and depends on the nature and credit quality of the particular firms. Credit scoring could lessen discrimination and redlining by reducing the role of bank personnel's racial biases in the underwriting process, especially for firms that were previously discriminated against and that are easily identified and/or approved by credit scoring methods. Investigations show that the use of credit scoring has a modest positive impact on the level of small business loans made by large banks in low- and moderate-income census tracts.
On the other hand, credit scoring could have a negative "disparate impact" on firms in lower income or minority areas for a variety of reasons. If there are more firms in such areas with marginal credit, then the average firm in such areas will be more expensive to lend to. Moreover, due to discrimination and other factors, many firms or would-be firms in lower-income areas may have little credit history and not qualify for scored loans. Finally, there continue to be significant problems with the accuracy of credit bureau information and, therefore, the reliability of credit scores. Small firms personal ...
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"Credit scoring for small business loans has turned this dynamic on its head. Because credit scoring is used for smaller loans, its increased adoption by larger banks has led to a substantial increase in the number of loans under $100,000 made by large institutions."