Fintech Borrowers: Lax Screening or Cream-Skimming?

We study the personal credit market using unique individual-level data covering fintech and traditional lenders. We show that fintech lenders acquire market share by lending first to higher-risk borrowers and then to safer borrowers, and rely mainly on hard information to make credit decisions. Fintech borrowers are significantly more likely to default than neighbor individuals with the same characteristics borrowing from traditional financial institutions. Furthermore, they tend to experience a short-lived reduction in the cost of credit, because their indebtedness increases more than non-fintech borrowers after loan origination. However, fintech lenders' pricing strategies are likely to take this into account.

Automated summary

Fintech lenders acquire market share by lending first to higher-risk borrowers and rely mainly on hard information to make credit decisions. Fintech borrowers are significantly more likely to default than individuals borrowing from traditional financial institutions and tend to experience a short-lived reduction in the cost of credit due to increased indebtedness.