Crowding Out Banks: Credit Substitution by Peer-To-Peer Lending

Abstract

Through superior technology, financial technology (FinTech) firms may expand credit markets. Alternatively, consumers may substitute one credit provider for another, generating adverse selection problems for incumbent lenders. We analyze the unsecured consumer loan market and identify the influence of FinTech lending on commercial banks using a novel approach that takes advantage of regulatory restrictions for FinTech borrowers and investors. We show that high-risk FinTech loans substitute for bank loans while low-risk loans may be credit expansionary. However, the influence on banks is heterogeneous. Our results highlight the changing landscape of financial intermediation and the regulatory challenges faced by FinTech firms.

Keywords: Financial Intermediation, Banking, Peer-To-Peer Lending, FinTech, Marketplace Lending, Crowdfunding, Security Registration

JEL Classification: G21, G23, L81, D53, G28