Information content in consumers’ digital footprint can augment credit bureau information and help lenders make better lending decisions – a situation that researchers say also could give financial technology (fintech) firms a leg up in competition with traditional financial intermediaries and help increase credit access for those without it.
“Understanding the importance of digital footprints for consumer lending is of significant importance,” according to the authors of On the Rise of the FinTechs – Credit Scoring using Digital Footprints, a working paper released by the Federal Deposit Insurance Corp. (FDIC) Center for Financial Research. “A key reason for the existence of financial intermediaries is their superior ability to access and process information relevant for screening and monitoring of borrowers. If digital footprints yield significant information on predicting defaults then FinTechs – with their superior ability to access and process digital footprints – can threaten the information advantage of financial intermediaries and thereby challenge financial intermediaries’ business models.”
For the paper, analysts evaluated the importance of digital footprint variables for default prediction using a data set with some 250,000 observations from an e-commerce company in Germany. The researchers’ data set contains a set of 10 digital footprint variables, among them the device type (for example, tablet or mobile), the operating system (for example, iOS or Android), the channel through which a customer comes to the website (for example, search engine or price comparison site). It also includes a credit score from a private credit bureau.
Analysts found a correlation between the score based on the digital footprint variables and the credit bureau score of approximately 10%. “As a consequence, the discriminatory power of a model using both the credit bureau score and the digital footprint variables significantly exceeds models that only use the credit bureau score or only use the digital footprint variables,” the paper states. “This suggests that the digital footprint complements rather than substitutes for credit bureau information and a lender that uses information from both sources (credit bureau score + digital footprint) can make superior lending decisions compared to lenders that only access one of the two sources of information.”
The discriminatory power of digital footprint data for unscorable customers also matches the discriminatory power for scorable customers, according to the paper. “These results suggest that digital footprints can indeed help to overcome 27 information asymmetries between lenders and borrowers when standard credit bureau information is not available,” the analysts write. Digital footprints, they state, could be used to help increase access to credit for parts of the currently 2 billion working-age adults worldwide that lack access to the “formal” financial sector.
On the Rise of the FinTechs—Credit Scoring using Digital Footprints (a working paper by Tobias Berg, Valentin Burg, Ana Gombović, and Manju Puri, presented by the FDIC Center for Financial Research)