When FinTech Competes for Payment Flows

TLDR

FinTech payment providers compete with banks, disrupting the banks’ ability to use payment data for credit assessment. This study examines how such competition affects a monopolist bank’s payment pricing and loan offers. The competition alters the bank’s payment service prices and the terms of its loan products. FinTech competition increases financial inclusion and bank lending through data sales and portability, yet its effect on consumer welfare and the loan market is mixed, with data sales offering a modest welfare advantage under mild conditions.

Abstract

Abstract We study the impact of FinTech competition in payment services when a monopolist bank uses payment data to learn about consumers’ credit quality. Competition from FinTech payment providers disrupts this information spillover. The bank’s price for payment services and its loan offers are affected. FinTech competition promotes financial inclusion, may hurt consumers with a strong bank preference, and has an ambiguous effect on the loan market. Both FinTech data sales and consumer data portability increase bank lending, but the effects on consumer welfare are ambiguous. Under mild conditions, consumer welfare is higher under data sales than with data portability.