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


  • Julapa Jagtiani
  • Catharine Lemieux


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 Lending Club and Y-14M bank stress test data. We find that Lending Club?s consumer lending activities have penetrated areas that could benefit from additional credit supply, such as areas that lose bank branches and those in highly concentrated banking markets. We also find a high correlation with interest rate spreads, Lending Club rating grades, and loan performance. However, the rating grades have a decreasing correlation with FICO scores and debt to income ratios, indicating that alternative data is being used and performing well so far. Lending Club borrowers are, on average, more risky than traditional borrowers given the same FICO scores. 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 Lending Club than from traditional lending channels.

Suggested Citation

  • Julapa Jagtiani & Catharine Lemieux, 2017. "Fintech Lending: Financial Inclusion, Risk Pricing, and Alternative Information," Working Papers 17-17, Federal Reserve Bank of Philadelphia, revised 18 Jul 2017.
  • Handle: RePEc:fip:fedpwp:17-17

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    References listed on IDEAS

    1. Usman Ahmed & Thorsten Beck & Christine McDaniel & Simon Schropp, 2015. "Filling the Gap: How Technology Enables Access to Finance for Small- and Medium-Sized Enterprises," Innovations: Technology, Governance, Globalization, MIT Press, vol. 10(3-4), pages 35-48, Summer-Fa.
    2. Iyer, Rajkamal & Khwaja, Asim Ijaz & Luttmer, Erzo F. P. & Shue, Kelly, 2009. "Screening in New Credit Markets: Can Individual Lenders Infer Borrower Creditworthiness in Peer-to-Peer Lending?," Working Paper Series rwp09-031, Harvard University, John F. Kennedy School of Government.
    3. Frame, W Scott & Srinivasan, Aruna & Woosley, Lynn, 2001. "The Effect of Credit Scoring on Small-Business Lending," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(3), pages 813-825, August.
    4. Seth M. Freedman & Ginger Zhe Jin, 2011. "Learning by Doing with Asymmetric Information: Evidence from," NBER Working Papers 16855, National Bureau of Economic Research, Inc.
    5. Julapa Jagtiani & Catharine Lemieux, 2016. "Small Business Lending After the Financial Crisis: A New Competitive Landscape for Community Banks," Economic Perspectives, Federal Reserve Bank of Chicago, issue 3.
    6. Jefferson Duarte & Stephan Siegel & Lance Young, 2012. "Trust and Credit: The Role of Appearance in Peer-to-peer Lending," Review of Financial Studies, Society for Financial Studies, vol. 25(8), pages 2455-2484.
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    Cited by:

    1. Nicola Pierri & Yannick Timmer, 2020. "Tech in Fin before FinTech: Blessing or Curse for Financial Stability?," CESifo Working Paper Series 8067, CESifo.
    2. Ding, Jie & Huang, Jinbo & Li, Yong & Meng, Meichen, 2019. "Is there an effective reputation mechanism in peer-to-peer lending? Evidence from China," Finance Research Letters, Elsevier, vol. 30(C), pages 208-215.
    3. Dungey, Mardi & Doko Tchatoka, Firmin & Yanotti, MarĂ­a B., 2018. "Using multiple correspondence analysis for finance: A tool for assessing financial inclusion," International Review of Financial Analysis, Elsevier, vol. 59(C), pages 212-222.
    4. Anagnostopoulos, Ioannis, 2018. "Fintech and regtech: Impact on regulators and banks," Journal of Economics and Business, Elsevier, vol. 100(C), pages 7-25.
    5. Gambacorta, Leonardo & Huang, Yiping & Qiu, Han & Wang, Jingyi, 2019. "How do machine learning and non-traditional data affect credit scoring? New evidence from a Chinese fintech firm," CEPR Discussion Papers 14259, C.E.P.R. Discussion Papers.
    6. Runjie Xu & Chuanmin Mi & Nan Ye & Tom Marshall & Yadong Xiao & Hefan Shuai, 2020. "Risk Fluctuation Characteristics of Internet Finance: Combining Industry Characteristics with Ecological Value," Papers 2001.09798,
    7. Nicola Pierri & Yannick Timmer, 2020. "Tech in Fin before FinTech: Blessing or Curse for Financial Stability?," CESifo Working Paper Series 8067, CESifo.
    8. Ashok Banerjee & Arindam Gupta, 2019. "Pradhan Mantri Jan Dhan Yojana as a financial inclusion drive: a case study of West Bengal," DECISION: Official Journal of the Indian Institute of Management Calcutta, Springer;Indian Institute of Management Calcutta, vol. 46(4), pages 335-352, December.
    9. Rouse, Marybeth & Batiz-Lazo, Bernardo & Carbo Valverde, Santiago, 2020. "All about the state-Fifty years of innovative technology to deliver an inclusive financial sector," MPRA Paper 102159, University Library of Munich, Germany.
    10. Anil Savio Kavuri & Alistair Milne, 2019. "FinTech and the future of financial services: What are the research gaps?," CAMA Working Papers 2019-18, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.

    More about this item


    peer-to-peer lending; Lending Club; marketplace lending; credit spreads; credit performance; banking competition; P2P lending; shadow banking; fintech;

    JEL classification:

    • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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