The quantity versus quality trade-off and lending platforms
Online lending platforms are faced with a trade-off between high loan volume and high quality loans, much like regular banks. But the dynamics behind this trade-off are different. Vallee and Zeng argue that what drives this trade-off for online lending platforms is the mix of sophisticated and unsophisticated investors. Sophisticated investors have the ability to pre-screen before buying the loans listed on the platform. Unsophisticated investors do not. The former buy fewer loans but of higher quality, the latter buy more loans but of lower quality. How do platforms manage this trade-off? By optimally limiting the information available on borrowers so that sophisticated investors are “tricked” into buying more loans!
Marketplace Lending: A New Banking Paradigm?
Authors: Boris Vallee, Yao Zeng
From: Harvard Business School, University of Washington
Racial discrimination in consumer lending: plus ça change…
Bartlett and al. argue that ethnic-minority borrowers pay almost $0.5B per year in extra interest, a finding that is consistent with non FinTech but also FinTech lenders! How can algorithms be racists? By using big data to proxy for legitimate repayment ability variables (e.g., hidden wealth), they introduce illegitimate statistical discrimination!
Consumer-Lending Discrimination in the FinTech Era
Authors: Robert Bartlett, Adair Morse, Richard Stanton, Nancy Wallace
From: U.C. Berkeley
