Tetyana Balyuk

Emory University

FinTech and the Future of Banking Conference

April 24, 2019
Balyuk (2019) Financial Innovation and Borrowers 1

 Imperfections in consumer credit market ($4 trillion in the U.S.)

 High rates, “pooled” credit card pricing, credit rationing...

 The Economist: “... for most borrowers, credit is scarce and costly”

 Recent entry of financial technology (FinTech) companies

 FinTech lending: 30% of personal unsecured loan market (TransUnion)

 Differentiation: Online presence, automation, and favorable regulation

+ alternative screening algorithms

 FinTech may relieve information frictions in consumer credit market

 Does it? How will banking change as a result of FinTech entry?

Research question: How does FinTech lending impact bank credit? 

 Examine how obtaining a loan from a FinTech lender affects credit 

provided by banks and consumers’ borrowing patterns

April 24, 2019
Balyuk (2019) Financial Innovation and Borrowers

 Direct matching of borrowers and lenders on-line

 Innovation in lending technology

 New public market for unsecured consumer debt

 Fully automated algorithm-based pricing and underwriting

P2P platforms

• Screening (pricing, adjudication)

• Loan origination and servicing

$48B in loans

Median loan: $12k

APR: 6.4%-36%

Borrowers

• On-line loan request 

‘Hard’ borrower data

April 24, 2019 2

Investors

• To fund or not?

• Funding amount?

1

2

3

4

...

1

2

3

4

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Balyuk (2019) Financial Innovation and Borrowers 3

 Banks increase access to credit following a P2P loan

 Increase in credit larger for more credit constrained borrowers

(shorter credit histories, lower credit scores)

 Effect primarily comes from existing lenders (intensive margin)

 Borrowing patterns of consumers change after P2P loan take-up

 Most borrowers refinance expensive credit card debt with P2P loans

 Marginally funded borrowers consume P2P loans, but obtain more access 

to bank credit nonetheless

 Credit scores do not improve for marginally-funded borrowers 

 No evidence of higher delinquencies despite larger total debt

⇒ Findings consistent with FinTech relieving information frictions for 

borrowers and information spillovers from FinTech to banks

April 24, 2019
Balyuk (2019) Financial Innovation and Borrowers

 P2P borrowers have strong borrower profile, but large amount of total 

debt and preference for consumption on credit cards

 Significant credit card utilization suggests credit constraints

April 24, 2019 4

Characteristic P2P All 

Monthly income $6.2k $2.5k

Employment (years) 8.9 

Credit history (years) 18.1

Home owner 48%

Total debt $151k $60k

Open accounts 10

Revolving accounts 8

Credit card utilization 54.5% 30%
Balyuk (2019) Financial Innovation and Borrowers 5

 Supply of bank credit

 Lax screening by P2P platforms → consumers overborrow and banks 

reduce access to credit for P2P borrowers

 Accurate screening by P2P platforms → extension of a P2P loan signals 

creditworthiness and banks increase access to credit for P2P borrowers 

 Demand for bank credit

 Creditworthy borrowers → benefit from credit repricing and shift away 

from bank debt toward P2P lending

 Marginal borrowers → benefit from reduced credit rationing and borrow 

from both banks and P2P platforms, increasing overall indebtedness

April 24, 2019
Balyuk (2019) Financial Innovation and Borrowers 6

 Higher credit limits on revolving accounts following a P2P loan

 P2P borrowers on average: $1,020 increase (+2.6%)

 Confirmed by analysis of marginally funded borrowers

 Increase in bank credit larger for more credit constrained borrowers

 Shorter credit history: +$3,370 for 1 year vs. +$900 for 20 years

 Lower credit score: +2.6% to +5.2% for FICO < 700

April 24, 2019

0.56

1.35*** 1.45***

0.25 0.032

-1.16 -0.78

-3.23

2.44 

-10%

-5%

0%

5%

10%

650 670 690 710 730 750 770 790 825

Economic magnitude

FICO bins (midpoints)

Revolver limits ($'000)
Balyuk (2019) Financial Innovation and Borrowers

 Revolving balances at banks lower following a P2P loan

 P2P borrowers on average: $1,480 decrease (-7.6%)

 No change for marginally funded borrowers

 Debt refinancing stronger for borrowers with higher FICO scores

 Credit scores are not significantly affected by P2P loan take-up

April 24, 2019 7

-1.01***

-0.65*** -0.62**

-1.90***

-2.79*** 

-2.47*** -2.25***

-3.75***

-0.68 

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

650 670 690 710 730 750 770 790 825

Economic magnitude

FICO bins (midpoints)

Revolving balance ($'000)
Balyuk (2019) Financial Innovation and Borrowers

 Total debt higher for P2P borrowers, especially those with lower FICOs

 P2P borrowers on average: +3.6% to +4.5%

 Slightly higher for marginally funded borrowers as well

 No evidence of higher debt accompanied by higher delinquencies

 P2P borrowers on average: some evidence of lower delinquencies

 Delinquencies do not increase for marginally funded borrowers

⇒ Borrowers whom P2P lenders screen in are likely creditworthy

April 24, 2019 8
Balyuk (2019) Financial Innovation and Borrowers 9

 Can banks indeed learn anything from P2P lending?

 Banks have experience and more information (soft and private)

 But: important differences between banks and FinTech

 Industry evidence that banks may outsource screening to FinTech

 Bank-FinTech partnerships: Regions Bank + Avant, Beneficial State Bank 

+ LendUp, JP Morgan + OnDeck, ING and Scotiabank + Kabbage

 Community banks invest in P2P loans on major platforms

 When can information about a P2P loan be a valuable signal?

 P2P lenders screen borrowers more precisely (e.g., machine learning)

 Screening by P2P lenders is complementary to bank screening

 P2P lenders screen borrowers that banks do not find profitable to screen

April 24, 2019
Balyuk (2019) Financial Innovation and Borrowers 10

 Extension of FinTech credit increases access to bank credit

 Especially for borrowers with shorter credit histories and lower scores

 Irrespective of the use of FinTech loans: debt refinancing vs consumption

 FinTech changes consumer demand for bank credit

 Most creditworthy borrowers shift away from bank debt, whereas 

marginal borrowers with preference for consumption do not

 Total debt increases for all FinTech borrowers

 Borrower creditworthiness is not significantly affected

 Avenues for future research

 How is the structure of bank revenues affected? What are the 

implications for risk in the banking sector? How should banks respond?

Key takeaway: FinTech innovation relieves information frictions 

April 24, 2019