Invisible Primes: Fintech Lending with Alternative Data

71 Pages Posted: 11 Oct 2021 Last revised: 8 Jan 2024

See all articles by Marco Di Maggio

Marco Di Maggio

Harvard Business School; National Bureau of Economic Research (NBER)

Dimuthu Ratnadiwakara

Louisiana State University, Baton Rouge

Multiple version iconThere are 2 versions of this paper

Date Written: May 28, 2022

Abstract

We study the impact of alternative data on credit access and borrower outcomes using anonymized data from a major fintech platform that uses alternative data and artificial intelligence in its underwriting models. Comparing actual outcomes of the fintech platform's model to counterfactual outcomes based on a "traditional model" used for regulatory reporting purposes, we find that the fintech platform's model approves 15-30% of low credit score applicants rejected by the traditional model and offers substantial reductions in interest rates. The borrowers most positively affected are the "invisible primes"—borrowers with low credit scores and short credit histories, but also a low propensity to default. About two-thirds of the effects are due to the inclusion of additional data, while the remainder is due to a more sophisticated underwriting model. Leveraging exogenous variations in credit access, we show that funding loans to invisible primes leads to better economic outcomes for borrowers.

Keywords: Fintech Lending, Alternative Data, Machine Learning, Algorithm Bias

JEL Classification: D14, H52, H81, J24, I23

Suggested Citation

Di Maggio, Marco and Ratnadiwakara, Dimuthu, Invisible Primes: Fintech Lending with Alternative Data (May 28, 2022). Available at SSRN: https://ssrn.com/abstract=3937438 or http://dx.doi.org/10.2139/ssrn.3937438

Marco Di Maggio (Contact Author)

Harvard Business School ( email )

Soldiers Field
Baker Library 265
Boston, MA 02163
United States

HOME PAGE: http://https://www.hbs.edu/faculty/Pages/profile.aspx?facId=697248

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Dimuthu Ratnadiwakara

Louisiana State University, Baton Rouge ( email )

Baton Rouge, LA 70803
United States

HOME PAGE: http://https://sites.google.com/view/dimuthu-ratnadiwakara

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