Digital disruptors at the gate. Does FinTech lending affect bank market power and stability?

Abstract

This paper examines the effect of FinTech lending on the market power and stability of incumbent banks. Using an international sample of 6,225 banks during the period 2013–2019, our results show that the volume of credit provided by FinTech lenders negatively affects bank market power and stability. These results are influenced by the legal framework and institutional quality of each jurisdiction. Furthermore, the impact of FinTech lending on bank stability is partially channeled by the effect of FinTech credit on the market power of incumbent banks. Our main results – lower bank market power and bank stability – are also observed at the country level and after addressing potential endogeneity concerns. Regarding policy implications, more prudential regulation on FinTech activity is needed to address information imbalance issues and potential risks stemming from their activities. Furthermore, reinforcing the legal framework and institutional structure could serve to mitigate the adverse effects of FinTech lending on the traditional commercial banking sector.