Author: Mark Joseph Johnson (Ph. D. in finance)Publisher:
ISBN:
Category : Loans
Languages : en
Pages : 0
Book Description
This dissertation contains three chapters that aim to improve our understanding of the pricing and supply of fintech credit made to small businesses and consumers. In the first chapter, I examine the contribution fintech makes in small business. Fintech promises improvements in access to credit through more efficient search and better pricing. Using novel data from a marketplace platform of 115,000 loan offers from 46 online lenders I show that the primary contribution of fintech is not in precisely measuring and pricing risk, but rather in facilitating search between small firms and preferred-habitat lenders. Loan offers are largely unexplained by firm characteristics and differ substantially even for the same applicant. The dispersion in offers is largely explained by the fact that lenders have preferred habitats—lending to borrowers of certain risk types and charging relatively uniform rates to all applicants. Borrowers match through the platform with lenders that offer the best rates, which leads to an equilibrium where prices appear to be closely tied to the characteristics of the firm. The findings highlight the importance of marketplace platforms that reduce search frictions for firms. In the second chapter, co-authored with Jason Lee and under the supervision of Itzhak Ben-David and Rene Stulz, we study the unsecured personal loan market and ask whether fintech lenders benefit from a lack of bank competition. We make use of banks’ decisions to restrict the supply of unsecured personal loans to prime borrowers (indicated by FICO scores above 660) as an instrument for reduced competition. Using novel data containing loan performance for millions of fintech borrowers, we find that fintech borrowers who fall just below prime (“near-prime” borrowers) face annual interest rates that are 10.1 percentage points (or 66%) higher than prime borrowers without an associated large jump in default rates. This results in high returns to the lenders—loans made to near-prime borrowers earn annual returns that are 6.9 percentage points higher than seemingly identical borrowers who differ only in potential access to bank credit. In the last chapter, co-authored with Professors Itzhak Ben-David and Rene Stulz, we ask why fintech credit to small businesses became so scarce at the beginning of the COVID-19 pandemic. Using daily data from a major small business fintech credit platform that enables us to identify separately the demand and the supply for credit, we document that the number of loan applications increased sharply early in the COVID-19 crisis, but the supply of credit collapsed as lenders dropped from the platform. Compared to March 2019, the probability that an applicant with identical characteristics received an offer is much lower during the last three weeks of March 2020. We show that the evolution of the supply is consistent with the default risk of potential borrowers becoming too high for loans to be profitable and with the disappearance of fintech lenders' funding.