4 AI-Powered Fintechs Revolutionizing the Future of Finance

Key Points

• Artificial intelligence (AI) models can assess thousands of data points not used by traditional credit scoring systems to assess credit worthiness of borrowers more efficiently.
• AI-powered lending platforms can enable more loan opportunities for banks while providing more consumers with loans that would otherwise have been held back using traditional credit ratings.
• AI-powered lending and underwriting are disrupting the finance sector with a long runway ahead, and they account for a tiny sliver of market share for now.

Artificial intelligence (AI) has been revolutionizing many sectors and industries enabling enhanced productivity and efficiencies. The computer and technology sector has been transformed with the AI boom as processing power continues to expand exponentially. AI is driving the medical sector into a new era of drug discovery, helping discover new treatments faster and bringing new medicines to market more efficiently.

AI is disrupting the finance industry as machine learning algorithms revolutionize age old processes once only performed by highly skilled actuaries and underwriters. Here are 4 AI-powered fintechs that are revolutionizing the future of the finance and financial services sectors.

Upstart Holdings: Disrupting the Lending Industry with AI Models That Mitigate Bias

The lending industry has been dominated by rigid, structured, and standardized processes used to determine the creditworthiness of borrowers. The highly regulated industry's use of credit bureaus to calculate credit and FICO scores is the standard that all financial institutions hang their hat on. Upstart Holdings Inc. NASDAQ: UPST sought to break the mold by utilizing AI to assess creditworthiness better. Its AI models go beyond traditional credit scores by analyzing over 1,600 variables to construct a more complete picture of borrowers.

Sophisticated machine learning algorithms seek to identify credit-worthy borrowers with limited credit history that would overwise be overlooked by traditional systems. Their AI models attempt to reduce bias in lending decisions by considering a wider range of data points, leading to more fair outcomes, especially for borrowers with diverse backgrounds.

The company is edging closer to profitability as losses were trimmed down to 7 cents per share in its third quarter of 2024. Revenues rose 20.4% YoY to $162 million, firmly beating the $149.32 million consensus estimates. Loan originations grew by 30% YoY to 188,149, totaling $1.6 billion across its platform. The company provided upside guidance for its fourth quarter 2024 of $180 million, crushing the consensus estimates for $162.26 million as contribution margins are forecast to hit 59%.

Pagaya Technologies: AI Network Helps Institutions Better Analyze Borrowers

While on the same theme of creating more accurate borrow profiles, Pagaya Technologies Ltd. NASDAQ: PGY deploys AI to help reshape the consumer lending market. Their AI network assists banks and financial institutions to better assess credit worthiness with more precise evaluations using data science. This results in more opportunities for the banks to make more loans and more consumers to receive loans.

It enables lenders to originate more loans to a wider and more diverse range of borrowers. It also helps institutional investors better assess loan purchases originated on their platforms, making it a win-win for the lender, borrowers and investors that finance the loans.

Pagaya turned profitable in its third quarter of 2024, posting EPS of 44 cents, crushing analyst estimates by 63 cents. Revenues rose 21% YoY to a record $257.23 million, beating estimates by $4.08 million. Personal loan network volume rose 15% YoY, and point-of-sale (POS) network volume grew 67% YoY. A top 5 bank, Elavon and US Bank's POS business are now lines on the Pagaya Network.

OppFi: Using AI to Serve the Underbanked Community

Over 60 million Americans lack access to traditional credit, as 72% of Americans have been denied a line of credit, and 51% have been denied a personal loan in the past year. OppFi Inc. NYSE: OPFI is an AI-powered platform that helps banks offer installment loans to the underbanked community.

The platform facilities services like SalaryTap, which is a secured installment loan product that uses payroll deductions to finance small loans to consumers. OppLoans helps facilitate loans through its bank partners to underbanked consumers who are often locked out of traditional loan options. OppFi uses AI to analyze a wider range of data points to assess creditworthiness, create personalized loan offers, and automate lending decisions.

OppFi reported third-quarter EPS of 33 cents, beating consensus estimates by 12 cents. Revenues rose 3.2% YoY to 126.3 million, beating estimates by $2.29 million. Net charge-off rates fell 370 bps to 32.5%, while net income margin rose 710 bps to 21.9%, and adjusted net income margin expanded by 660 bps to 19.6%. Recoveries of previous charged-off receivables rose 30% YoY. The company raised its full-year earnings guidance by 20% and issued its first special dividend of 12 cents per share.

Lemonade: AI-Powered Insurance Provider Disrupts the Industry

AI-powered risk models provide personalized insurance policies and automated claims processing serviced by AI-powered chatbots sums up what digital insurer Lemonade Inc. NYSE: LMND does. Users can get renters, car, homeowners, pet and life insurance policies using its app or website in minutes. AI is integrated into every aspect of operations. The more types of insurance products you get, the more discounts you earn with its customized bundling.

The company faced much criticism and had many doubters questioning the effectiveness of AI-powered underwriting versus human actuaries, but the company may be proving them wrong. Lemonade is still losing money, as evidenced by its third quarter of 2024 EPS loss of 95 cents, but still beat consensus estimates by 7 cents. Revenues rose 19.3% YoY to $136.6 million, beating consensus estimates of $129.1 million.

Investors were relieved as losses fared better than expected, considering the high-profile hurricanes experienced this year. The market approves as shares have surged 222.8% year-to-date (YTD), driven by its 30.67% short interest as of Nov. 27, 2024.