Fed finds fintech lenders may create more inclusive financial system

A new working paper by the Federal Reserve Bank of Philadelphia used loan-level data from two fintech lenders, Funding Circle and LendingClub, to assess how the companies’ pre-pandemic lending patterns differed from those of traditional banks. The report finds fintechs contribute to a “more inclusive” financial system, expanding credit to more companies and at a lower cost.

The paper’s conclusions rely heavily on data from Funding Circle’s loans from 2016-2019. While the Fed describes LendingClub’s loans, the company had a smaller overall level of activity (about $540 million in loan volume), and so was not included in the empirical analyses.

The report finds that Funding Circle’s model seems to provide credit to businesses that may not be able to access it elsewhere. The company had a larger share of loans in zip codes with higher rates of business bankruptcy, and it regularly made loans to owners that had a credit score low enough to prevent access to loans from traditional banks. The Fed paper found that the company’s internal risk modeling provides a better prediction of future repayment than traditional measures of loan risk.

The working paper ends with an important caveat: these findings are based on the behaviors of two fintech lenders, and are not necessarily relevant across the entire, diverse field as it stands. Still, the authors believe that the data suggest reasons for optimism about the potential of nontraditional lenders.