Whether we use cash or not may seem a somewhat esoteric means of determining our creditworthiness, but research from Wharton suggests that lenders are using our cashless payment status and the payment records that are generated to screen loan applicants.

The users of cashless payment systems can benefit from this approach by virtue of lower interest rates as they generally have a lower risk of defaulting.  The authors argue that these benefits could drive more people towards cashless payment systems.

Assessing credit risk

Traditionally, lenders use a range of criteria to assess our credit risk, but the new wave of fintechs entering the market tend to rely more on alternative data that goes beyond your credit score.  The range of alternative data used includes our social media and other online activities, our payment patterns, and our geolocation information.

“If you think about small business owners, what they buy and sell and the related payment data are directly linked to their business model, which in turn is directly linked to their creditworthiness,” the researchers say.

What’s more, the researchers believe that by using this kind of alternative data, the companies are able to better serve previously underserved populations who may ordinarily be excluded by virtue of having poor credit scores.

Verifiable records

Whereas cash transactions often become unknowable, electronic payments create verifiable records that can better help lenders establish someone’s creditworthiness.

“When you use cashless payments as a borrower, you provide more data to the lender to help the lender better understand you,” the researchers say.

What’s more, the quality of the data helps to make loan application approvals more efficient as well as lowering the risk of default, which together promises lower interest rates for consumers.  Indeed, after analyzing payments and loans at Indian fintech lender Indifi, they found that people using only cashless payments were nearly 11% more likely to get a loan, and their interest rate would be 1.72% lower.

Given the findings, it is perhaps no great surprise that a growing number of digital payment companies are beginning to offer loans as well, with the likes of Square and PayPal leading the way in capitalizing on the synergies outlined in the research.  There are, of course, various concerns should payment firms become too big, as the risks of financial exclusion could rear their heads again.

“The information they collect about people may potentially raise privacy concerns,” the authors conclude. “Such information may also lead to concentrated market power, and new regulatory frameworks are called for to balance the benefits and risks of platforms since they are not regulated like banks.”