Fintech Disruption, Banks, and Credit (Dis-)Intermediation: When Do Foes Become Friends?

Abstract

We build a financial intermediation model wherein bank and fintech intermediaries differ in their enforcement technology, reliance on collateral, and funding cost and compete or partner within frictional credit markets. The model explains the emergence and coexistence of three forms of lending associated with: (i) standalone banks, (ii) standalone fintechs, and (iii) bank-fintech partnerships. Fintech disruption enhances market competition and facilitates credit intermediation to previously underserved borrowers, but crowds out bank-captive borrowers as banks experience low profitability and get displaced. In equilibrium, fintech entry and the prevalence of partnerships do not necessarily benefit all borrowers, leading to ambiguous aggregate credit and welfare effects.

Keywords: Credit Intermediation, Financial Technology, Limited Commitment, Search and Matching

JEL Classification: D83, G21, G28, J20