Lending Competition and Funding Collaboration

Abstract

We examine competition and collaboration between banks and fintech firms in a market with adverse selection. Banks have cheaper funding, while fintechs have better screening technology. Our innovation is to allow the bank to lend to the fintech, i.e., to finance its competitors. This partnership lowers fintech funding costs and reduces bank competition incentives. Lenders collaborate when average borrower quality is low but compete when it’s high. While partnership funding always benefits the fintech, it increases the bank’s profits only when the average borrower quality is low and benefits the borrowers only when the average quality is high.

Keywords: fintech, lending competition, partnership funding, adverse selection, winner’s curse, financial inclusion

JEL Classification: G21, G23