Fintech Entry and Credit Market Competition

50 Pages Posted: 27 Apr 2021 Last revised: 3 Jan 2022

See all articles by Yinxiao Chu

Yinxiao Chu

University of International Business and Economics (UIBE) - School of Banking and Finance

Jianxing Wei

University of International Business and Economics (UIBE) - School of Banking and Finance

Date Written: April 16, 2021

Abstract

This paper studies how the rise of financial technology (Fintech) lending affects market competition, distribution of credit, and social welfare. We consider a spatial model with two incumbent banks and one potential entrant—a Fintech lender—wherein both types of lenders can screen borrowers and obtain private signals of their creditworthiness. Moreover, the signals of the banks and the Fintech lender are conditionally independent and asymmetric. Contrary to the standard view, we show that the entry of the Fintech lender could negatively impact high credit quality borrowers' access to credit when the Fintech lender's screening accuracy is not sufficiently high. Furthermore, we find that the Fintech lender's entry may worsen the allocative efficiency of credit and reduce social welfare under certain conditions.

Keywords: Fintech lending, Bank, Screening, Credit availability, Social welfare

JEL Classification: D82; G21; L13; L15

Suggested Citation

Chu, Yinxiao and Wei, Jianxing, Fintech Entry and Credit Market Competition (April 16, 2021). Available at SSRN: https://ssrn.com/abstract=3827598 or http://dx.doi.org/10.2139/ssrn.3827598

Yinxiao Chu

University of International Business and Economics (UIBE) - School of Banking and Finance ( email )

No.10, Huixindong Street
Chaoyang District
Beijing, 100029
China

Jianxing Wei (Contact Author)

University of International Business and Economics (UIBE) - School of Banking and Finance ( email )

No.10, Huixindong Street
Chaoyang District
Beijing, 100029
China

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