Invisible Primes: Fintech Lending with Alternative Data

62 Pages Posted: 11 Oct 2021

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

Don Carmichael

University of Houston - C.T. Bauer College of Business

Date Written: October 6, 2021

Abstract

We exploit anonymized administrative data provided by a major fintech platform to investigate whether using alternative data to assess borrowers' creditworthiness results in broader credit access. 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 latter would result in up to 60% higher probability of being rejected and higher interest rates for those approved. 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. We show that funding loans to these borrowers leads to better economic outcomes for the borrowers and higher returns for the fintech platform.

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

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

Suggested Citation

Di Maggio, Marco and Ratnadiwakara, Dimuthu and Carmichael, Don, Invisible Primes: Fintech Lending with Alternative Data (October 6, 2021). 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

Don Carmichael

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States

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