Banks struggle to root out bias in algorithms
‘The board has to weigh up benefits. It’s not about buying a book of loans, it’s about getting the technology’
BANKS are struggling to audit algorithms for racial bias because of European privacy laws, experts warn.
A privacy clampdown has made collecting the information needed to work out if an automated system has made an unfair decision difficult under General
Data Protection Regulation in the UK and Europe, businesses have said.
Scientists have long warned that automated systems which make decisions about who to lend money to may be as prejudiced as humans because the data used to train the algorithm may not be diverse enough to be fair.
Roger Taylor, chairman of the Centre of Data Ethics in Innovation, said: “In the UK, GDPR and the Data Protection Act should not prevent organisations from effectively auditing their algorithms for bias, but it is clear that uncertainty on this point could prove a blocker for organisations.”
Grabbing attention was never something Metro Bank struggled with. Its branch openings featured dancers on stilts, popcorn stands, face painting and bands playing music. Vernon Hill, its flamboyant founder, who once brought Biggin Hill’s annual air show to a standstill so he could fly to Italy in his private jet, tried to make the lender seem as cuddly as possible with the motto “dogs rule”. The UK had never seen a bank like it. But the cuddly image came to an end last year. A loans blunder sent its shares crashing, wiping £800m off its market cap in one day, and it has struggled to recover. The gaffe shone a light on corporate governance concerns, and by the end of the year both Hill and Craig Donaldson, the chief executive, had gone. Probes into the loans error are ongoing.
Fast-forward to today and the bank’s new boss, Dan Frumkin, is debating whether to go ahead with a takeover of Ratesetter, the peer-to-peer lender, in the midst of a global health pandemic that has hit the economy hard. It is not an easy decision. “The worry is you would have the Ratesetter brand ‘owned by Metro Bank’ so then if its loans default, customers will lose out [and Metro looks bad],” one person aware of the talks said. “The board has to weigh up benefits. It’s not about buying a book of loans, it’s about getting the technology, and building one from scratch would take much longer.”
Ratesetter, which matches those who want to borrow with those who want to lend, and like Metro was founded in 2010, has had its own fair share of struggles. The peer-to-peer lending giant was previously backed by Neil Woodford, the fund manager, and fell to a £26.7m loss in 2018 after it was forced to acquire the “carcass” of a motor lending business. The pandemic has put the sector under further strain. However, Ratesetter’s loans are thought to be no riskier than any of its rivals, none of its investors have ever lost money, and it does not expect losses in the future. The company, whose board is run by Paul Manduca, the Prudential chairman, has close to £70m protecting investors’ capital on its £800m loan portfolio. Its expertise in the personal loans space could be a big boost to the embattled bank, which is eager to grow in this area.
“If you go to a Metro branch and want an unsecured loan, it would take two to three hours [to assess] and most would get a no as the bank doesn’t have the sophistication of data to make an informed decision,” says one person close to the process. “With this deal the technology would be provided by Ratesetter, the loans would be white-labelled as Metro.”
As the board weighs up the pros and cons of snapping up the business after the worst year in its history, and as the UK economy shrinks, the price of any deal becomes even more crucial. Analysts have said Ratesetter could be sold for £50m, a figure that has been repeated by Frumkin internally. Sources insist the talks are not driven by Jaime Gilinski Bacal, the Colombian billionaire. Bacal recently became one of Metro’s top investors. However his background in banking means he is often used to “bounce ideas off ” and he speaks to the chief executive regularly, one source says.
Frumkin and the rest of the board will have to tread very carefully over the coming months. Having already nursed huge losses and with the bank still facing the results of a regulatory investigation into its loans error, investors have little patience left for further mistakes.
Spokesmen for Metro and Ratesetter declined to comment.