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

Authors: Julapa Jagtiani; Catharine Lemieux;

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

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.

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selected citations
These citations are derived from selected sources.
This is an alternative to the "Influence" indicator, which also reflects the overall/total impact of an article in the research community at large, based on the underlying citation network (diachronically).
BIP!Citations provided by BIP!
popularity
This indicator reflects the "current" impact/attention (the "hype") of an article in the research community at large, based on the underlying citation network.
BIP!Popularity provided by BIP!
influence
This indicator reflects the overall/total impact of an article in the research community at large, based on the underlying citation network (diachronically).
BIP!Influence provided by BIP!
impulse
This indicator reflects the initial momentum of an article directly after its publication, based on the underlying citation network.
BIP!Impulse provided by BIP!
28
Top 10%
Top 10%
Top 10%
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