Borrowing from fintech companies can increase the risk of personal default. According to the study, consumers who borrow from fintech lenders are more likely to spend more of their funds, ultimately increasing their total debt. Unlike borrowers with a similar credit profile who take out loans from traditional banks.
If you are confused by the terminology, let us remind you that fintechs are companies, technological startups that provide financial products using high technologies, which, of course, are based on the Internet, as well as various software installed on user devices.
All of this serves to improve and automate traditional forms of financing for businesses and consumers alike. This includes, for example, online banks, payment systems, cryptocurrency, investment mobile applications and much more.
The conventional wisdom has been that fintech lenders operate with more data and have a deeper understanding of their borrowers than traditional banks. That is, they can take into account not only the current official income, but also such nuances as the constancy of rent and other bills. This allegedly helps to identify creditworthy individuals who are denied by conventional banks.
However, research suggests that their clients are more likely to default on their loans.
This is especially true for those who take additional consumer loans from fintech companies to pay off credit card debt. In this case, they only partially consolidate their debts, but after a while they find that they can use the credit card again and the total debt starts to snowball.
This type of behavior is less likely for traditional bank customers, suggesting that fintechs are attracting consumers with a higher propensity to overspending. According to the study, the risk of personal default for borrowers at fintech companies is 25% higher than for borrowers at classical banks.