FinTech vs. Bank: The impact of lending technology on credit market competition

Abstract

Does the recent proliferation of technology in lending process have an impact on business loan market competition? Using a theoretical model that assumes heterogeneity in lenders’ screening abilities and borrowers’ investment horizons, we show that FinTech (Traditional) lenders primarily supply unsecured (asset-backed) loans to borrowers with short-term (long-term) projects. The model builds on the interplay between screening ability and collateral requirements to characterize the competition between two ex-ante symmetric lenders. Lenders use screening technology and collateral requirements to mitigate competition and restrict the supply of credit through an endogenous segmentation of the loan market. As information technology improves, the effect on credit supply and equilibrium interest rates becomes more nuanced and depends on the market segment. The results offer a supply-side explanation for the growth of unsecured lending.

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