FinTech Lending with LowTech Pricing
Charles A. Dice Center Working Paper No. 2023-08
52 Pages Posted: 12 Apr 2023
Date Written: April 11, 2023
FinTech lending—known for using big data and advanced technologies—promised to break away from the traditional credit scoring and pricing models. Using a comprehensive dataset of FinTech personal loans, our study shows that loan rates continue to rely heavily on conventional credit scores, including 45% higher rates for nonprime borrowers. Other known default predictors are often neglected. Within each segment (prime/nonprime) loan rates are not very responsive to default risk, resulting in realized loan-level returns decreasing with risk. The pricing distortions result in substantial transfers from nonprime to prime borrowers and from low- to high-risk borrowers within segment.
Keywords: FinTech, Personal loans, Credit score, Nonprime borrowers, Market segmentation
JEL Classification: G21, G23, G50
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