Language Flags

Translation Disclaimer

HPCwire Enterprise Tech HPCwire Japan

February 29, 2012

The Profitability of Failure

Banks have lost at their own game. The long list of failures tells the story of stunted loans and bad bets. Instead of waiting for credit to flow again, however, a number of startups think they can do a better job at underwriting by tapping the power of machine learning algorithms.

Machine learning is gaining unprecedented attention these days due to the buzz around big data analytics. The technology’s ability to draw information from disparate data sources—all the while learning from experience--has companies like Wonga jumping into the world of alternative lending.

The company began as a same-day cash outfit, and claims to be the Internet’s first fully automated creditor. It took just days after startup for a borrower to default on a micro-loan, but this was all part of the plan.

For the first year, SameDayCash was feeding data to the model that would eventually run Wonga. The service did more than just check for a credit scores. It pulled as much data about its borrowers as possible, including online profile information.

After learning from the SameDayCash project, which at one point saw a 50% default rate, Wonga began issuing short-term loans. In one year, it issued 100,000 loans amounting to £20 million. The company earned £15 million through interest payments, while the banks missed out again.

Even though the company has a 95 percent satisfaction rate, there are some vocal critics about how the company operates. Mainly, the Representative 4214% APR printed on the front page of their website (Wonga says the number is closer to 360% APR) has proven controversial. 

On that note, some even joked that an individual could be on the hook for more than the U.S. national debt after seven years of non-payment. To Wonga’s defense, the website simply does not allow anyone to borrow for a year.

Wonga is not alone in the field of micro lending, other companies like Zestcash, Kabbage, and OnDeck all run similar, small lending operations that rely on machine-learning to vet borrowers.

One area most of these companies have in common though, is an inability to provide solid, long-term loans. Almost all of them only offer short-term, unsecured, subprime loans. To move into the realm of long-term prime loans, the companies have to be willing to burn precious capital while their algorithms learn what makes a good home loan.

As the banks sort through the mess of bad paperwork and failed loans from the housing crisis, machine learning may get a chance to prove itself as the only way to run risk analysis.

Related Stories

Research Spawns "Anomalator" to Fight Financial Collapse

Financial Firms See Big Data's Big Picture

Netuitive Banking on Predictive Analytics


Share Options


» Subscribe to our weekly e-newsletter


There are 0 discussion items posted.


Most Read Features

Most Read News

Most Read This Just In

Cray Supercomputer

Sponsored Whitepapers

Planning Your Dashboard Project

02/01/2014 | iDashboards

Achieve your dashboard initiative goals by paving a path for success. A strategic plan helps you focus on the right key performance indicators and ensures your dashboards are effective. Learn how your organization can excel by planning out your dashboard project with our proven step-by-step process. This informational whitepaper will outline the benefits of well-thought dashboards, simplify the dashboard planning process, help avoid implementation challenges, and assist in a establishing a post deployment strategy.

Download this Whitepaper...

Slicing the Big Data Analytics Stack

11/26/2013 | HP, Mellanox, Revolution Analytics, SAS, Teradata

This special report provides an in-depth view into a series of technical tools and capabilities that are powering the next generation of big data analytics. Used properly, these tools provide increased insight, the possibility for new discoveries, and the ability to make quantitative decisions based on actual operational intelligence.

Download this Whitepaper...

View the White Paper Library

Sponsored Multimedia

Webinar: Powering Research with Knowledge Discovery & Data Mining (KDD)

Watch this webinar and learn how to develop “future-proof” advanced computing/storage technology solutions to easily manage large, shared compute resources and very large volumes of data. Focus on the research and the application results, not system and data management.

View Multimedia

Video: Using Eureqa to Uncover Mathematical Patterns Hidden in Your Data

Eureqa is like having an army of scientists working to unravel the fundamental equations hidden deep within your data. Eureqa’s algorithms identify what’s important and what’s not, enabling you to model, predict, and optimize what you care about like never before. Watch the video and learn how Eureqa can help you discover the hidden equations in your data.

View Multimedia

More Multimedia

Job Bank

Datanami Conferences Ad

Featured Events

May 5-11, 2014
Big Data Week Atlanta
Atlanta, GA
United States

May 29-30, 2014
St. Louis, MO
United States

June 10-12, 2014
Big Data Expo
New York, NY
United States

June 18-18, 2014
Women in Advanced Computing Summit (WiAC ’14)
Philadelphia, PA
United States

June 22-26, 2014

» View/Search Events

» Post an Event