Digital Lenders and the Displacement of Traditional Banking

Posted: 2 Oct 2012 Last revised: 5 Nov 2019

See all articles by Sergio Vicente

Sergio Vicente

Universidad Carlos III de Madrid; Queen Mary University of London

Date Written: September 12, 2012


What is the effect of credit scoring on loan-officers banking? I construct a model in which digital lenders compete with traditional banks. Digital lenders have access to more precise credit scores (economies of scale in credit scoring), but traditional banks can employ information gathered by loan officers at a lower cost (diseconomies of scale in the acquisition and transmission of soft information). I find that digital lenders cream-skim the best firms in the market and displace traditional banks from a lending segment where traditional banks are more efficient, leading to an inefficiently low amount of soft information acquisition that translates into higher rates of default. I also show the conditions under which this cream-skimming inefficiency more than offsets the cost-reduction gains introduced by credit scores. A per-loan Pigouvian tax on digital lenders combined with a revenue-neutral lump-sum rebate eliminates the inefficiency. The paper provides a set of empirical predictions that match the received empirical evidence and new testable hypotheses.

Suggested Citation

Vicente, Sergio, Digital Lenders and the Displacement of Traditional Banking (September 12, 2012). Midwest Finance Association 2013 Annual Meeting Paper. Available at SSRN: or

Sergio Vicente (Contact Author)

Universidad Carlos III de Madrid ( email )

CL. de Madrid 126
Madrid, Madrid 28903

Queen Mary University of London ( email )

United Kingdom

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