FinTech Credit and Traditional Bank Credit: Allies or Opponents?

Abstract

FinTech servicers have grown rapidly largely in response to a gradually more stringent and complex regulatory environment for the traditional banking sector as a result of the recent financial crisis. FinTech credit refers to the credit activity facilitated by electronic platforms, which are commonly referred to as “loan-based crowd funders”, “peer-to-peer (P2P) lenders”, or “marketplace lenders”. This involves borrowers being matched directly with investors. FinTech credit platforms’ heavy digitalisation of processes and specialised focus are supposed to lower transaction costs and entail convenience for end users. With its high-technology platforms and ability to use alternative information sources for credit decisions, FinTech organisations are deemed as enhancing access to credit and investments for underserved segments of the population or the business sector, like, e.g., Small and Medium Entreprises (SMEs) and start-ups. Indeed, FinTech platforms facilitate various forms of credit, including consumer and business lending, lending against real estate, non-loan debt funding such as invoice financing, to name a few. As such, they directly challenge traditional banking institutions by ‘threatening’ to poach a significant share of their existing and potential credit customers. Hence, FinTech is considered by several policy-makers, practitioners, and scholars as being an opponent for traditional credit intermediaries. However, we should not ignore the flip side of the coin. First, there is a variation in the creditor base of FinTech credit platforms. Although a portion of funding sources is linked to retail investors, several FinTech entities resort to institutional investors, many of which are traditional banks, to attract funds. Indeed, banks typically originate loans for FinTech credit platforms nowadays, thus being ones of the closest allies for these newly-born entities. Second, banks have been building up their digital banking activities for some years now, and the emergence of FinTech lending platforms has sped up this process. Actually, there are examples of cooperation among FinTech lenders and banks, which may be of mutual benefit, such as knowledge sharing and funding. In this paper we shed ample light on both sides of the coin, that is, the synergies as well as the antagonism between FinTech platforms and traditional lenders. Towards this, we explore the development of FinTech credit markets and how this affects credit provision and the traditional bank lending. Moreover, we analyse the functioning and the nature of the FinTech credit markets as well as the size and growth relative to credit extended by traditional financial institutions and also with respect to the overall credit in the economy.

Keywords: FinTech; Banks; Credit Provision; Synergies

JEL Classification: C45; D02; G21; G23