Slowing Down Digital Credit

Context

The digital credit market has recently emerged as a source of fast, remotely-provided, short-term loans for millions of people in low- and middle-income countries. But the consumer protection implications of easy, quick credit are not well known. Evidence from the credit card market shows that less sophisticated borrowers may be especially susceptible to over-borrowing, penalties, and back loading repayment, suffering large welfare losses as a result. Similarly, while digital credit may be able to help households cope with unexpected shocks, the ease and speed of accessing lines of credit could potentially increase defaults or over-indebtedness.

Study Design

The researchers work with a web-based lender in Mexico to investigate the effect of delayed delivery of otherwise relatively instant credit. To receive this digital loan, the consumer submits an application on the lender’s website for which they receive immediate preliminary approval or rejection, and then approvals are further confirmed by an agent. Borrowers are unaware that agents then send approved loans to the bank in “batches” two to four times per day. This batch disbursement system leaves some consumers waiting longer to access funds than others–just missing the previous batch doubles the disbursement time from 10 to 20 hours on average. The researchers use these delays from batch processing to study whether longer waiting periods affect repayment behavior.

Results and Policy Lessons

The research team found that when consumers are subject to longer wait times, repayments increase by 5.6 percentage points, a 21% decrease in the default rate. The researchers do not have access to data on how the digital loans were used, making it difficult to determine why longer waiting periods reduce default. The researchers hypothesize that delays might prevent borrowers’ ability to act on timely spending opportunities, or that borrowers took the time to deliberate about spending or repayment, given repayment improves among married borrowers in particular. Further research on delivery speed–especially about how digital credit is used or about how delays affect the demand for credit–could speak to whether mandatory waiting periods are a sensible consumer protection policy within the digital credit space.