Leveraging network topology for credit risk assessment in P2P lending: A comparative study under the lens of machine learning

Abstract

Peer-to-Peer (P2P) lending markets have witnessed remarkable growth, revolutionizing the way borrowers and lenders interact. Despite their increasing popularity, P2P lending poses significant challenges related to credit risk assessment and default prediction with meaningful implications for financial stability. Traditional credit risk models have been widely employed in the field of P2P lending; however, they may not be capable to capture latent factor information inherent to a loan network based on similarity distances. Thus, in this study we propose an enhanced two- step modeling approach for machine learning (ML) that utilises insights from network analysis and subsequently combines derived network centrality metrics with traditional credit risk factors to improve the prediction accuracy in the credit default prediction process. Through a comparative analysis of three classical ML models with varying degrees of complexity, namely Elastic Net (EN), Random Forest (RF), and Multi-Layer Perceptron (MLP), we showcase novel evidence that the systematic inclusion of network topological features in the credit scoring process can significantly improve the prediction accuracy of the scoring models. Additional robustness tests via the inclusion of randomly shuffled centrality metrics in the analysis, and a further comparison of the graph-based models against a pertinent state-of-the-art credit scoring model in form of XGBoost further confirm our results. The insights from this study bear valuable conclusions for P2P lending platforms to further improve their scoring systems with graph-enhanced metrics, thereby reducing default risk and facilitating greater access to credit.