Did Fintech Loans Default More During the COVID-19 Pandemic? Were Fintech Firms “Cream-Skimming” the Best Borrowers?

Brandon Goldstein, Julapa Jagtiani and Catharine Lemieux

No 23-26, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: A growing portion of consumer credit has recently been devoted to unsecured personal installment loans. Fintech firms have been active players in this market, with an increasing market share, while the market share of banks has declined. Studies of fintech lending have shown that their digital access and ability to leverage alternative data have increased accessibility in underserved areas, enabled consumers with thin credit files to obtain credit, and provided a lower cost alternative to long-term credit card financing. This paper exams three questions: (1) Do proprietary loan rating systems accurately predict the likelihood of default? (2) Can a proprietary loan rating system, leveraging alternative data, that was developed in a favorable economic period continue to perform well under adverse economic conditions (such as the COVID-19 pandemic)? (3) Have fintechs been “cream skimming,” i.e., underpricing the cost of credit to top-tier customers? This study uses data from LendingClub, one of the largest fintech lenders in the personal loan market. We find that LendingClub’s loan rating system is superior to traditional measures of credit risk when predicting the likelihood of default and that the loan rating system continued to perform well during the pandemic period. Finally, we find no evidence of cream skimming.

Keywords: Fintech; peer-to-peer (P2P); alternative data; financial inclusion; credit access; COVID-19; fintech loan default; cream skimming; fintech loan rate (search for similar items in EconPapers)
JEL-codes: G18 G21 G28 L21 (search for similar items in EconPapers)
Pages: 51
Date: 2023-11-10
New Economics Papers: this item is included in nep-ban, nep-cfn, nep-fle, nep-pay and nep-rmg
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DOI: 10.21799/frbp.wp.2023.26

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