Fintech Innovations in Banking: Fintech Partnership and Default Rate on Bank Loans

We explore whether banks could leverage data and technology to expand their customer base without taking on more credit risk. Previous studies have not explored the impact of fintech partnerships on the quality of banks’ loan portfolios. Our analysis utilizes data on relevant bank– fintech partnerships and loan-level data from Y-14M reports. For credit cards, we find that banks that had fintech partnerships extended larger lines of credit to consumers with low credit scores or missing credit scores. We also find that credit card default rates declined among nonprime borrowers with missing credit scores. For mortgages, unlike credit cards, our sampled banks did not grant larger mortgage loans to nonprime borrowers, however, the fintech tools seem to have improved the effectiveness of banks’ credit decisions, resulting in a decline in mortgage default rates. Further analysis of the interest rate spread residual shows that, after gaining access to fintech tools, banks were better able to differentiate between nonprime borrowers that were good credit risks and those that were not. This was evident in the pricing of the loans after the banks entered partnerships. This allowed banks with access to fintech tools to attract creditworthy nonprime borrowers by giving them (appropriately) discounted mortgage rates relative to the traditional risk pricing models. Those banks continued to charge risky nonprime borrowers a large risk premium on their mortgages. Overall, fintech partnerships have made it possible for banks to offer a larger credit card line and charge a lower mortgage interest rate to some nonprime borrowers while seeing nonprime defaults decline on average