FinTech & Financial Frictions: The Rise of Revenue-Based Financing

61 Pages Posted: 16 Nov 2023

See all articles by Dominic Russel

Dominic Russel

Harvard University - Business School (HBS)

Claire Shi

Harvard Business School

Rowan Clarke

Harvard University, Harvard Business School, Students

Date Written: July 21, 2024

Abstract

We use transaction-level data from a major payment processor to study FinTech-provided small business "revenue-based financing." After eight months, payments through the processor are 16% lower for businesses who take financing offers than observably similar non-takers, driven by moral hazard from revenue hiding and adverse selection. Two natural experiments suggest FinTech platforms' non-lending interactions with small businesses---e.g., payment processing and inventory management---can limit both hiding and selection. By tying repayment to the continued use of non-lending products, FinTechs can mitigate enforcement and monitoring frictions. Our results help explain the rise of FinTech-provided revenue-based financing.

Keywords: moral hazard, adverse selection, small business lending, FinTech

JEL Classification: D21, D22, G20, G23

Suggested Citation

Russel, Dominic and Shi, Claire and Clarke, Rowan, FinTech & Financial Frictions: The Rise of Revenue-Based Financing (July 21, 2024). Available at SSRN: https://ssrn.com/abstract=4608506 or http://dx.doi.org/10.2139/ssrn.4608506

Dominic Russel

Harvard University - Business School (HBS) ( email )

Boston, MA 02163
United States

Claire Shi (Contact Author)

Harvard Business School ( email )

Rowan Clarke

Harvard University, Harvard Business School, Students ( email )

700 Soldiers Field Road
Harvard Business School
Cambridge, MA 02163
United States

HOME PAGE: http://www.rowanclarke.io/

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