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

32 Pages Posted: 15 May 2018

See all articles by Julapa Jagtiani

Julapa Jagtiani

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Catharine Lemieux

Federal Reserve Bank of Chicago

Date Written: 2018-04-05

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, LendingClub, Marketplace Lending, Alternative Data, Shadow Banking, P2P Lending, Peer-to-peer Lending

JEL Classification: G18, G21, G28, L21

Suggested Citation

Jagtiani, Julapa and Lemieux, Catharine, The Roles of Alternative Data and Machine Learning in Fintech Lending: Evidence from the Lendingclub Consumer Platform (2018-04-05). FRB of Philadelphia Working Paper No. 18-15. Available at SSRN: https://ssrn.com/abstract=3178461 or http://dx.doi.org/10.21799/frbp.wp.2018.15

Julapa Jagtiani (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Catharine Lemieux

Federal Reserve Bank of Chicago

230 South LaSalle Street
Chicago, IL 60604
United States

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