Fintech Lending: Financial Inclusion, Risk Pricing, and Alternative Information

Abstract

Fintech has been playing an increasing role in shaping financial and banking landscapes. Banks have been concerned about the uneven playing field because fintech lenders are not subject to the same rigorous oversight. There have also been concerns about the use of alternative data sources by fintech lenders and the impact on financial inclusion. In this paper, we explore the advantages/disadvantages of loans made by a large fintech lender and similar loans that were originated through traditional banking channels. Specifically, we use account-level data from the LendingClub and Y-14M bank stress test data. We find that LendingClub’s consumer lending activities have penetrated areas that lose bank branches and in those in highly concentrated banking markets. LendingClub borrowers are, on average, more risky than traditional borrowers given the same FICO scores. We also find a high correlation between interest rate spreads, LendingClub rating grades, and loan performance. However, the correlations between the rating grades and FICO scores (at origination) have declined from about 80 percent (for loans that were originated in 2007) to only about 35 percent for recent vintages (originated in 2014-2015) -- indicating that alternative data has been increasingly used. The use of alternative information sources has allowed some borrowers who would be classified as subprime by traditional criteria to be slotted into “better” loan grades and therefore get lower priced credit. Also, for the same risk of default, consumers pay smaller spreads on loans from the LendingClub than from credit card borrowing.