Essays on Banking and Fintech Competition

Abstract

My dissertation analyzes the competition between traditional banks and alternative lenders, namely Fintechs or Peer-to-Peer (P2P) platforms, in the context of credit to small businesses. P2P platforms are online marketplaces that directly match lenders with borrowers without the intermediation of a bank. This study is conducted in partnership with the Brazilian Central Bank and Jose Renato Haas Ornellas, which provided the data of virtually all unsecured working capital loans to small businesses in Brazil. The dissertation is divided into two chapters, an empirical and a theoretical. In chapter 1, we understand the profile and credit conditions of P2P borrowers, and estimate that banks react to the competition with the P2P lenders. Compared to traditional banks, P2P clients are relatively smaller, riskier and get lower interest rates. Once they borrow from P2Ps, they find a lower rate on subsequent bank loans, indicating that banks try to recapture runaway borrowers. In response to P2P entry, incumbent banks in oligopolistic markets decrease their lending rates by 2.5 percentage points and expand credit supply by 7%. In chapter 2, we rationalize these findings in a structural model of the banking sector, where banks and P2Ps have different profit functions and compete for clients with risk heterogeneity. We use the estimated model to calculate welfare gains. P2Ps significantly increase social welfare in oligopolistic markets by offering lower interest rates to riskier borrowers and forcing the banks to do the same. Welfare gains range from 10% of the local output in municipalities with only one incumbent bank to 1% in those with five banks. Our findings highlight the importance of alternative financing sources in inefficient credit markets due to banking concentration.