Consumers turning to fintech lenders are more likely to spend beyond their means, sink further into debt, and ultimately default more often than people with similar credit profiles borrowing from traditional banks, according to recent research.

The study, Fintech Borrowers: Lax-Screening or Cream-Skimming?, was written by Marco Di Maggio, the Ogunlesi Family Associate Professor of Business Administration at Harvard Business School, and Vincent Yao, an associate professor from Georgia State University’s J. Mack Robinson’s School of Business.

The findings run contrary to conventional wisdom that fintech lenders harvest deeper insight into those borrowers that banks typically reject after running a standard credit check. Fintech lenders claim to consult additional metrics like utility bills or rent payments to identify creditworthy individuals that are overlooked by traditional lenders.

“If you put the results into the context that most of the fintech companies claim that they use alternative data, it’s very surprising that their borrowers are more likely to default,” Di Maggio says.

Di Maggio and Yao tracked 3.79 million loans for 1.88 million borrowers using detailed national data from one of the three major credit reporting agencies over several years. This offered an in-depth look at borrowers that either used a fintech company or a bank to obtain a personal loan. (A personal loan is an unsecured loan that is usually provided to consolidate existing higher-cost credit card debt.)

That’s a far more extensive sample of consumer credit behavior than previous studies, which tend to focus on data from a single fintech lender like LendingClub and provide no bank comparison. The authors then tracked performance of all borrowers’ loans from four months before the personal loan origination up to 15 months after.

“FINTECH BORROWERS ONLY PARTIALLY CONSOLIDATE THEIR DEBTS, AND THEN A FEW MONTHS DOWN THE LINE, THEY KNOW THAT THEY HAVE THESE CREDIT CARDS THAT ARE EMPTY AND THEY START USING THEM AGAIN.”


In a nutshell, fintech borrowers who initially improved their credit scores by consolidating some of their credit card debt saw a deterioration in those scores months down the line as they began to use their credit lines to consume more goods, from purchasing a car to buying everyday items, the researchers found.

By a year after the fintech loan, more than 5 percent were likely to default. That’s a 25 percent increase in risk of default compared to similar bank borrowers.

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