Working Paper: CEPR ID: DP17705
Authors: Giulio Cornelli; Jon Frost; Leonardo Gambacorta; Julapa Jagtiani
Abstract: Small business lending (SBL) plays an important role in funding productive investment and fostering local economic growth. Recently, nonbank lenders have gained market share in the SBL market in the United States, especially relative to community banks. Among nonbanks, fintech lenders have become particularly active, leveraging alternative data for their own internal credit scoring. We use proprietary loan-level data from two fintech SBL platforms (Funding Circle and LendingClub) to explore the characteristics of loans originated pre-pandemic (2016‒2019). Our results show that fintech SBL platforms lent more in zip codes with higher unemployment rates and higher business bankruptcy filings. Moreover, fintech platforms’ internal credit scores were able to predict future loan performance more accurately than the traditional approach to credit scoring, particularly in areas with high unemployment. Using Y14M loan-level bank data, we also compare fintech SBL with traditional bank business cards in terms of credit access and interest rates. Overall, fintech lenders have a potential to create a more inclusive financial system, allowing small businesses that were less likely to receive credit through traditional lenders to access credit and to do so at lower cost.
Keywords: Small Business Finance
JEL Codes: G18; G21; G28; L21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| fintech lending (G21) | credit access (G21) |
| fintech lending (G21) | credit access in underserved areas (G21) |
| fintech lending (G21) | credit access for borrowers less likely to receive funding from traditional banks (G21) |
| fintech platforms' internal credit scores (G21) | future loan performance (G51) |
| fintech platforms' internal credit scores (G21) | predictive accuracy (C52) |
| fintech lenders (G21) | lower costs of borrowing (G21) |
| fintech lending in areas with higher unemployment rates (G21) | credit access (G21) |
| fintech lending in areas with higher business bankruptcy filings (G21) | credit access (G21) |