Why cashless payments open the door to fintech loans

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Fintech lenders are more likely to approve loans to borrowers who have adopted cashless payments than to non-adopters, according to a recent research paper titled “FinTech loans and cashless paymentsBy experts from Wharton and elsewhere.

The cashless payment records of these borrowers provide lenders with verifiable information and hence more effective screening of loan applications. These borrowers could also benefit from lower interest rates and have lower default risks, the document notes. These benefits could push more borrowers to adopt cashless payments, the researchers predicted.

Fintechs assess borrowers on criteria beyond the credit scores traditional lenders consider, said Wharton finance professor Yao Zeng, who co-wrote the article with Pulak gosh, professor of decision science at the Indian Institute of Management, and Boris Vallée, professor of business administration at Harvard Business School. “Fintechs rely on electronic platforms and big data, and in particular alternative data beyond your credit score to help screen borrowers,” Zeng noted.

“Alternative data” considered by fintechs includes internet and social media activities of loan seekers, geolocation information, and payment methods, Zeng said. “If you think of small business owners, what they buy and sell and the associated payment data relates directly to their business model, which in turn is directly related to their creditworthiness,” he said. Using alternative data, fintechs are also reaching underserved populations who may not have “a long enough or good enough credit history” and therefore find it difficult to obtain credit from traditional banks, he added. .

“The challenge with money is that no one will ever know what happened,” Zeng said. But payments through PayPal or Venmo create verifiable records that help both borrowers and fintech lenders accurately establish creditworthiness, he explained. “When you use cashless payments as a borrower, you provide more data to the lender to help them understand you better. This superior data quality helps lenders be more efficient at approving loan applications, thereby reducing their risk of default. This reduced risk will manifest itself in the form of a lower interest rate than loan seekers who cannot provide a cashless payment trail.

An evidence-based model

The paper makes its case in two parts. One is a theoretical model that discovers a synergy between fintech loans and cashless payments. Cashless payments provide “a lot of verifiable information outside of the loan relationship,” such as the alternative data described above. The second is causal evidence of how the use of more or less verifiable external information affects loan results. Research has revealed this evidence in the portfolio of a prominent fintech lender in India called Indifi.

Analysis of Indifi’s loan application data showed that compared to a borrower who always uses cash, a borrower who always uses cashless payments has a 10.9% higher probability of getting a loan. loan and a lower interest rate of 1.72%, while the expected default rate is 5.7. % inferior.

Between September 2015 and September 2019 (period covered by the study), Indifi approved a quarter of all loan applications with an average proposed interest rate of 24.8% and a default rate of 7.3%. The average loan size was equivalent to $ 5,632 and the average maturity was 15.2 months. Most were unsecured loans.

“When you use cashless payments as a borrower, you provide more data to the lender to help them understand you better. ” –Yao Zeng

Incidentally, India experienced a increased cashless payments after demonetizing some high-value banknotes in November 2016. Consumer adoption of fintech worldwide has increased significantly increased between 2015 and 2019, with the strongest growth in remittances and payments.

Future opportunities and challenges

Fintechs have an “informational synergy” with cashless payments, and fintech lending could grow with data sharing and open banking, the researchers noted in their article. This could lead to “the development of an alternative banking model without a balance sheet or traditional banking relationships,” they added. Already, technology-focused payment service companies like PayPal and Square have started offering loan products, Zeng noted, realizing the synergy predicted by the document.

Despite the synergy between lending and payments and the resulting financial inclusion gains, concerns can arise if fintech platforms get too big, like Alipay and WeChat Pay in China, Zeng continued. Each has nearly a billion users. “The information they collect on individuals can potentially raise privacy concerns,” he said. “Such information can also lead to concentrated market power, and new regulatory frameworks are needed to balance the benefits and risks of platforms as they are not regulated like banks. “


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