Global fintech and funding innovation ecosystem

The Dark Side of Fintech Borrowing

HBS Working Knowledge | Rachel Layne | Oct 25, 2020

borrowing - The Dark Side of Fintech BorrowingFintechs have revolutionized the banking industry, but some customers end up worse for the experience, according to research by Marco Di Maggio and colleagues.

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.

See: Where are the Biggest Fintech Startup Hotspots Around the World?

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.

In his study, Di Maggio 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.

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.

See: Fintechs to play an “even more important” role coming out of lockdown, says British Business Bank

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.

This type of behavior is less likely among bank borrowers, suggesting that fintechs attract a different type of loan-seeker—one with a higher propensity to overspend—which is not something easily captured in their credit reports.

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