What's Your Bank's Fintech Score? Fintech Integration Transforms Banks from Costly Dealers Into Brokers
61 Pages Posted: 8 Jan 2021 Last revised: 11 Sep 2022
Date Written: September 10, 2022
Fintech firms mobilize information technology to provide intermediation services using a broker methodology, whereas dealer banks intermediate using leveraged balance sheets. The integration of Fintech into banking (either holistically or via mergers) may reduce the unit cost of intermediation by shifting the production function from dealer to broker. A "Fintech score" is derived using nonlinear and machine learning algorithms that show on-balance sheet lending for low Fintech score dealer banks versus securitization, brokered deposits, and non-interest income for high score, broker banks. Using Data Envelopment and Stochastic Cost Frontier Analyses, we find that banks with higher Fintech scores are more operationally efficient.
Keywords: Fintech, operational costs, broker, dealer, market making, match making
JEL Classification: G20, G21, G23, G24
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