2021
Working Paper
HBS Working Paper Series

Invisible Primes: Fintech Lending with Alternative Data

By: Marco Di Maggio, Dimuthu Ratnadiwakara and Don Carmichael

Format:Print
| Language:English
| Pages:64

Abstract

We exploit anonymized administrative data provided by a major fintech platform to investigate whether using alternative data to assess borrowers’ creditworthiness results in broader credit access. Comparing actual outcomes of the fintech platform’s model to counterfactual outcomes based on a “traditional model” used for regulatory reporting purposes, we find that the latter would result in a 60% higher probability of being rejected and higher interest rates for those approved. The borrowers most positively affected are the “invisible primes”—borrowers with low credit scores and short credit histories, but also a low propensity to default. We show that funding loans to these borrowers leads to better economic outcomes for the borrowers and higher returns for the fintech platform.

Keywords

Fintech Lending; Alternative Data; Machine Learning; Algorithm Bias; Finance; Technology; Financing and Loans; Data and Data Sets; Credit

Citation

Di Maggio, Marco, Dimuthu Ratnadiwakara, and Don Carmichael. "Invisible Primes: Fintech Lending with Alternative Data." Harvard Business School Working Paper, No. 22-024, October 2021.