What is Fueling FinTech Lending? The Role of Banking Market Structure

Abstract

We study how the presence of incumbents employing different technologies affects FinTech penetration using small business lending as a laboratory. We find more FinTech market penetration where large and out-of-market banks are more prevalent. Using stress test exposures and CRA examinations as instruments, we further find FinTech credit more often substitutes for loans by large/out-of-market banks than small/in-market banks. Results are consistent with FinTech advantages in processing hard information, rather than hardening soft information. FinTech loans become somewhat safer after replacing bank loans, counter to cream-skimming arguments. We finally find that FinTech and bank lending both yield real economic benefits.

Keywords: FinTech, in-market banks, large banks, lending technologies, out-of-market banks, small banks, small business lending

JEL Classification: G21, G23, O33