The FinTech opportunity
Thomas Phillipon explains why FinTech innovation can bring a significant improvement to the financial sector:
- The unit cost of financial intermediation has declined only marginally since the crisis both in the US and other advanced countries. Recent research also suggests that many advanced economies have reached a point where “more finance” is not helpful. Entry of FinTech firms can result in significant welfare gains by facilitating strategic disintermediation and revolutionizing how existing firms create and deliver products and services;
- From a regulatory standpoint, transforming incumbent financial firms into safe and efficient providers of financial services is an uphill battle as the distortions embedded in the current system are complex and protected by powerful incumbents who benefit directly and indirectly from them.
The FinTech Opportunity
Author: Thomas Philippon
From: New York University
The impact of FinTech on banks
Cornaggia and Wolfe analyze empirical evidence that clarifies the impact of emerging FinTech firms on traditional financial intermediaries. They find that:
- Loan levels at the commercial banks are negatively affected by the high-risk portion of the peer-to-peer loan flow and indifferent to lower risk peer-to-peer loan volume, suggesting that the aggregate displacement is driven by the poor credit quality borrowers’ net substitution away from commercial banks. An indirect result is that high-credit-quality borrowers’ access to credit expands with peer-to-peer expansion;
- The loss in personal loan volume is concentrated among small commercial banks with assets under $300 million, whereas large commercial banks do not appear to suffer any loan losses as a result of increased competition from peer-to-peer lending.
Crowding Out Banks: Credit Substitution by Peer-to-Peer Lending
Authors: Jess Cornaggia, Brian Wolfe
From: Pennsylvania State University, University of Buffalo
Fintech, Bigtech and banks
Banks are unique in that they combine the production of liquid claims with loans. They can replicate most of what FinTech firms can do, but FinTech firms benefit from an uneven playing field in that they are less regulated than banks. The uneven playing field enables non-bank FinTech firms to challenge banks for specific products whose success is not tied to what makes banks unique, but they cannot replace banks as such. In contrast, BigTech firms have unique advantages that banks cannot easily replicate and therefore present a much stronger challenge to established banks in consumer finance and loans to small firms.
FinTech, BigTech, and the Future of Banks
Author: René M. Stulz
From: Ohio State University
