Fintech Lending and Credit Market Competition

Yinxiao Chu and Jianxing Wei

♦ This paper studies how the rise of financial technology (Fintech) lending affects credit access, interest rates, and social welfare. We consider a lending competition model with two incumbent banks and a Fintech lender, who use different information and technologies to access borrower creditworthiness. We show that Fintech lending could negatively affect high-quality borrowers’ access to credit when the Fintech lender’s screening accuracy is superior to that of the banks. Furthermore, Fintech lending may worsen the allocative efficiency of credit and reduce social welfare under some conditions. Analytical and numerical results suggest that Fintech lending mostly reduces the expected interest rates.

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