Fintech platforms: Lax or careful borrowers' screening?

Area of Science:

• Financial Technology (Fintech)
• Credit Risk Management
• Behavioral Economics

Background:

• Peer-to-peer (P2P) lending platforms connect borrowers and lenders, bypassing traditional financial institutions.
• Concerns exist regarding the potential for fraudulent behaviors and the effectiveness of platform-based verification processes.
• Lender collection performance is crucial for the sustainability of P2P lending markets.

Purpose of the Study:

• To investigate whether P2P lending platforms can effectively mitigate fraudulent behaviors.
• To develop a novel proxy for assessing lending platform misconduct.
• To analyze the impact of platform verification on lender collection performance, specifically the recovery rate (RR) of non-performing loans.

Main Methods:

• Construction of a new proxy to measure lending platform misconduct.
• Comparative analysis of FICO scores and LendingClub credit grades.
• Application of a mixed-continuous model to explore the recovery rate (RR) of non-performing loans.

Main Results:

• Increased platform prudence in pre-screening negatively correlates with detecting misreporting borrowers.
• Missing verification data from Fintech platforms (e.g., income, employment) significantly impacts the RR of non-performing loans.
• Inadequate verification processes by lending platforms hamper overall lender collection performance.

Conclusions:

• P2P lending platforms face challenges in mitigating borrower fraud due to insufficient verification.
• The absence of robust verification mechanisms by Fintech platforms negatively affects lender recovery rates.
• Enhancing verification processes is critical for improving the reliability and performance of P2P lending.