What Drives Racial Minorities to Use Fintech Lending? Evidence from a Structural Estimation

Abstract

Using linked datasets on Paycheck Protection Program and Yelp restaurants, I document that minority-owned businesses borrow more from fintech lenders than traditional lenders. To understand the mechanisms underlying this phenomenon, I extend and estimate Schwert (2018)'s two-sided matching model between borrowers and lenders. I find that fintech-minority matches generate greater values than other matches, suggesting taste-based discrimination of Becker (1957). Counterfactual analysis shows the importance of this value channel. Disabling this channel reduces minority borrowers' usage of fintech by approximately 70%. Disabling lending relationships and bank branch channels reduces minority borrowers' use of fintech by less than 2%.

Keywords: Racial Barriers, Minority-owned Businesses, Fintech, Paycheck Protection Program, Small Business Lending, Bank Lending, Nonbank Lending

JEL Classification: D63, G2, G21, G28, H25, M14