The prospectus for online retail finance company Afterpay provides a lengthy description of the company's "transaction integrity engine", which makes fraud and repayment assessments "in real time" and issues automated finance approvals. According to the prospectus: "The engine assesses a multitude of transaction attributes and data in real time and applies this information against rules, which are continually being updated to determine whether or not to approve a transaction. "The engine also allows Afterpay to conduct continuous profiling of end-customers that interact with the Afterpay system. The transaction integrity engine is a significant competitive advantage because it allows Afterpay to minimise end-customer transaction losses and maintain competitive pricing for retail merchant clients."Afterpay, which started trading last year was listed on the Australian Securities Exchange in May, provides finance that allows consumers to make an online purchase and pay for the item in four equal fortnightly instalments.Afterpay pays the merchant upfront and assumes payment risk. The merchant pays Afterpay fees on transactions, while the consumer pays no fees or interest (although they are liable for late fees).The company issued its first financial report as a listed company last month, showing it had underlying sales of A$37.3 million and received payments of $1.4 million from around 300 merchants. The average transaction value was around $150.Trade receivables at June 30 were $7.5 million and the bad and doubtful debt expense was $567,481. The ratio of impairments to receivables was 7.5 per cent.Fintech lenders like Afterpay claim that the sophistication of their credit scoring algorithms and the broad sweep of customer data they collect give them an edge over traditional lenders. However, the claim is not supported by the available evidence.Afterpay is not the only example of a fintech whose claim to superior credit quality does not stand up to scrutiny.DirectMoney's financial report for the year to June shows that it charged $146,898 for bad debts and $87,803 for doubtful debts. It also wrote off $179,609 for losses on the sale of loan assets, after selling non-performing loans to a debt buyer at less than face value.The total impairment charge of $414,310 represents 5.4 per cent of loans on the balance sheet or 3.2 per cent of total loans under management (DirectMoney manages a $5 million portfolio of loans it sold to Macquarie Bank and about $1 million of loans it sold into a unit trust).DirectMoney had some problems with its credit assessment, identity verification and fraud detection processes early in its life.Such was the extent of the problem that the Australian Securities and Investments Commission made the company release a supplementary prospectus for its listing on the Australian Securities Exchange last year detailing the issues.DirectMoney chief executive Peter Beaumont said these issues have been sorted out.Beaumont said: "Significant adjustments to the company's credit team and credit processes made during the first half of 2015 have materially improved the credit performance of loans written subsequently."He pointed out that of $11.2 million of loans written in the year to June only about $40,000 has been