Wide and deep learning for peer-to-peer lending. (15th November 2019)

• Record Type: Journal Article
• Authors: Bastani, Kaveh; Asgari, Elham; Namavari, Hamed
• Is Part Of: Expert systems with applications. Volume 134(2019)
• Page Start: 209
• Page End: 224
• Publication Date: 2019-11-15
• Subjects: Wide and deep learning -- Peer-to-peer lending -- Credit scoring -- Profit scoring; Expert systems (Computer science) -- Periodicals; Systèmes experts (Informatique) -- Périodiques; Electronic journals; 006.33
• DOI: 10.1016/j.eswa.2019.05.042
• Languages: English
• ISSNs: 0957-4174

Abstract

Highlights: A scoring approach is proposed in the context of peer-to-peer lending. The proposed approach helps lenders decide their fund allocations. The scoring approach is a two-stage model using wide and deep learning. Memorization and generalization are achieved in the prediction task. Abstract: This paper proposes a two-stage scoring approach to help lenders decide their fund allocations in peer-to-peer (P2P) lending market. The existing scoring approaches focus on only either probability of default (PD) prediction, known as credit scoring, or profitability prediction, known as profit scoring, to identify the best loans for investment. Credit scoring fails to deliver the main need of lenders on how much profit they may obtain through their investment. On the other hand, profit scoring can satisfy that need by predicting the investment profitability. However, profit scoring is not free from the imbalance problem where most of the past loans are non-default. Consequently, ignorance of the imbalance problem significantly affects the accuracy of profitability prediction. Our proposed two-stage scoring approach is an integration of credit scoring and profit scoring to address the above challenges. More specifically, stage 1 is designed to identify non-default loans while the imbalanced nature of loan status is considered in PD prediction. The loans identified as non-default are then moved to stage 2 for prediction of profitability, measured by internal rate of return. Wide and deep learning is used to build the predictive models in both stages to achieve both memorization and generalization. Extensive numerical studies are conducted based on real-world data to verify the effectiveness of the proposed approach. The numerical studies indicate our two-stage scoring approach outperforms the existing credit scoring and profit scoring approaches.