FinTech Marketplace Lending, Default Risk, and the Business Cycle

Abstract

This paper explores default in the FinTech marketplace lending market using a dataset of both extensive credit and soft information for borrowers from the largest marketplace lender in the United States. I find that both macro and regional economic conditions play a role in consumer default and should be taken into consideration when assessing credit risk. I show that lenders operating in this market increasingly focus on subprime borrowers, whose default rates are more sensitive to macro and regional economic conditions than those of prime borrowers. Based on estimates from a duration model, I provide counterfactual analyses of what default rates and the associated total losses would look like in different economic scenarios. In the case of a recession, the losses would be 37 percent higher than in the case of an expansion. For the same volume of loans in the recession, doubling the subprime share would lead to an additional 7.5 percent increase in losses.

Keywords: FinTech, marketplace lending, P2P, default risk, losses, business cycle

JEL Classification: G21, G28, G18, G01