How is New Lending Technology Changing the Financial Sector?
Over the past decade and a half, since the 2008 financial crisis, the United States has seen unprecedented growth of technology in the lending process. It has reached the point where some lenders now rely solely on the financial technology (FinTech) to make lending decisions.
Traditionally, banks have relied on credit scores from agencies like FICO to make lending decisions – a time-consuming process requiring extensive paperwork and in-person meetings – that is less accessible for many borrowers.
In the recent years, FinTech companies, like SoFi and LendingClub, use advanced technologies such as artificial intelligence (AI) and big data analytics to assess creditworthiness. These technologies analyze a wide range of data points, including social media activity, online transaction history and even utility payments, to make more informed lending decisions quickly.
To better understand how FinTech has impacted the business loan market, Konstantinos Serfes, PhD, a professor of economics in the LeBow College of Business, developed a theoretical model to compare FinTech with traditional bank lending practices. The study, “FinTech vs. Bank: The Impact of Lending Technology on Credit Market Competition,” was recently published in the Journal of Banking & Finance.
In an interview with the Drexel News Blog, Serfes shared how this technology is transforming lending; how his model can be applied to compare other loans — beyond those for small businesses; and the advantages and disadvantages of both FinTech and traditional bank loans.
Q: What is the biggest takeaway from your research?
A: One key aspect of the research is the role of technology in transforming the lending landscape. The study emphasizes that advancements in screening technology can significantly impact credit supply and interest rates. At the same time, it acknowledges the limits of screening technology in evaluating long term risks. It also highlights the importance of regulatory oversight to ensure that the growing role of FinTech lenders does not lead to systemic risks in the financial system.
Read more on the Drexel News Blog.
