Reimagining Risk For The 21st Century
“The greater the risk, the greater the reward.” It’s a truism that undergirds much of our everyday decision making. For instance, you would normally only jump from a three story building if your life were at risk. The return on the jump could yield several more priceless years. If you have a flat tire, do you risk incurring more financial loss due to a bent rim as you continue driving to the nearest shop? Or do you call a tow truck?
It’s important to understand that how we view risk has a direct impact on the promotion or stagnation of innovation in our society. By its very nature, what is new is unknown; because of the unknown, the traditional underwriting process assigns more risk to innovative business practices. This over-compensating for risk slows job growth and value creation for a community.
“It’s important to understand that how we view risk has a direct impact on the promotion or stagnation of innovation in our society.”
Traditional lending institutions (the de facto experts on financial risk mitigation) wrestle through the same difficult paradigm as the rest of us… how do we determine our risk exposure? Conversations and negotiations around the issues of lending and risk tend to be rooted in a zero sum mindset: who gets the reward; who bares the risk; who is protected? Is it even possible to adequately control risk in a way that both parties could participate in increased rewards?
If both parties were completely focused on protection of self in lending, then the borrower would want funds with no terms and the lender would want a guaranteed return (the latter is by far the current acceptable norm). If everyone in the world were wanting to “make a deal,” borrowers and lenders alike would be able to keep looking until they found a party willing to meet them on whatever middle ground they’ve decided is the middle. Of course, that’s not the case in the real world.
At the core of the issue you find fear and greed on both sides. The lender fears loss, and a greedy borrower desires limitless access to unearned capital. A greedy lender desires ever higher returns, and the borrower fears they won’t earn enough to payoff the loan.
Far too many people are comfortable with one-sided risk mitigation from lenders, and far too many borrowers shirk important commitments to repay. Lenders (not just banks but also individuals and other entities) typically have the high ground in our economy. The right to all of a borrower’s equity is considered just even if it’s far in excess of what was owed; and high interest loans penalize borrowers who do pay in full. All of this steals potential from the economy, and earned income from borrowers via excessive interest repayments and/or penalties.
How do we leverage the data and technological capabilities of our time to re-orient lending in a way that provides more rewards to all parties involved? How do we also channel these resources to evaluate and promote the competitive advantages of humans, such as good character?
Access to capital is a key ingredient for the internal strength building of society, and as such the problem of “unqualified borrowers” is a problem to be solved rather than a reason to say no. Lending individuals and organizations should take the same approach as nearly every other industry rushing to prototype, gain customer feedback, and pivot. What would a world in which lenders are more focused on pushing capital out for value creation than internal risk mitigation and profit generation look like?
