Fintech Entry and Credit Market Competition

Abstract

This paper presents a spatial model to analyze the effects of the entry of Fintech lenders on credit market competition and welfare. In the model, banks compete with a Fintech lender for borrowers under asymmetric information. Both types of lenders can screen borrowers before making a loan, and their signals are conditionally independent and asymmetric. The Fintech lender will enter the market if its screening ability is sufficiently high or the credit market is not very competitive. Increased competition from Fintech entrants erodes banks' profitability. Contrary to the standard view, Fintech entry could hurt borrowers' access to credit and worsen allocative efficiency. Fintech entry crowds out banks in the long run and may reduce social welfare.