The Roles of Alternative Data and Machine Learning in Fintech Lending: Evidence from the LendingClub Consumer Platform

Julapa Jagtiani and Catharine Lemieux

No 18-15, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: Supersedes Working Paper 17-17. Fintech has been playing an increasing role in shaping financial and banking landscapes. There have been concerns about the use of alternative data sources by fintech lenders and the impact on financial inclusion. We compare loans made by a large fintech lender and similar loans that were originated through traditional banking channels. Specifically, we use account-level data from LendingClub and Y-14M data reported by bank holding companies with total assets of $50 billion or more. We find a high correlation with interest rate spreads, LendingClub rating grades, and loan performance. Interestingly, the correlations between the rating grades and FICO scores 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 nontraditional alternative data have been increasingly used by fintech lenders. Furthermore, we find that the rating grades (assigned based on alternative data) perform well in predicting loan performance over the two years after origination. The use of alternative data has allowed some borrowers who would have been classified as subprime by traditional criteria to be slotted into ?better? loan grades, which allowed them to get lower priced credit. In addition, for the same risk of default, consumers pay smaller spreads on loans from LendingClub than from credit card borrowing.

Keywords: Fintech; lending club; Marketplace Lending; Alternative Data; Shadow Banking; P2P Lending; Peer-to-peer Lending (search for similar items in EconPapers)
JEL-codes: G18 G21 G28 L21 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2018-04-05
New Economics Papers: this item is included in nep-ban, nep-big, nep-cmp and nep-pay
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Citations: View citations in EconPapers (9)

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Related works:
Journal Article: The roles of alternative data and machine learning in fintech lending: Evidence from the LendingClub consumer platform (2019)
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DOI: 10.21799/frbp.wp.2018.15

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