FinTech Lending and Cashless Payments

Résumé

We provide a new perspective on the rise of FinTech lending by uncovering an informational synergy with cashless payments. Theoretically, FinTech lenders screen borrowers more efficiently when borrowers use cashless payments that produce transferable and verifiable information. In turn, because borrowers expect lenders to rely on such payment information to screen them, a strategic consideration to stand out from non-adopting borrowers pushes more borrowers to adopt cashless payments. Using novel loan application data from a leading Indian FinTech lender targeting small businesses and an instrumental variable based on the 2016 Indian Demonetization, we identify that a larger use of cashless payments predicts a higher likelihood of loan approval, a lower interest rate, and lower default. These relationships are stronger for firms of higher observable risk, and for firms of higher quality that can be only inferred from payment records. This synergy supports data sharing and open banking, and more broadly the development of an alternative banking model without a balance sheet or traditional banking relationships.