Marketplace Lending: Matching Small Businesses with Specialized Fintech Lenders

Fintech promises improvements in access to credit for small businesses 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 rate 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. Interest rates sort borrowers such that the highest interest rate lenders match with firms that have been rejected by lenders with lower rates. This sorting leads to equilibrium loan rates that 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 seeking credit among lenders with distinct lending practices.