Fintechs rush in where bankers fear to tread: Federal Reserve

Federal Reserve study finds fintechs do actually provide loans to borrowers banks neglect

Fintechs give loans to those left behind by traditional lenders, new research from the Federal Reserve's Philadelphia district has found. 

Fintech lenders flatter themselves as champions of small business. As a helping hand to poor borrowers denied credit by the banks. The self-flattery is mostly true, new research from the Federal Reserve has found.

According to a paper published by the Fed’s Philadelphia district, fintechs go where bankers fear to tread and are, for the most part, cheaper.  

“For the same risk of default, consumers pay smaller spreads on loans from [fintech] than from traditional lending channels, implying that fintech lending has provided credit access to consumers at a lower cost,” the report concluded.

“We have presented evidence that fintech lenders fill credit gaps in areas where bank offices may be less available and provide credit to credit worthy borrowers that banks may not be serving.”

The study looked only at Lending Club data. Lending Club was chosen because it is one of the largest fintechs and its data is publicly available.

While finding that fintechs were filling a gap left by banks, the report denied that banks and fintechs are direct competitors.

Using technology to improve finance is not exclusive to fintech startups: the most successful technology users in finance have been major banks. This is true even in small business lending, fintech’s traditional stronghold, the report claimed.

Banks and fintechs are also increasingly cooperating rather than competing.

The report cites JP Morgan Chase and OnDeck’s partnership as a prime example. OnDeck provides the facilities to give automated loans to Chase customers. The loans are entirely Chase branded and held on the bank’s balance sheet.