Does alternative digital lending affect bank performance? Cross-country and bank-level evidence

This paper examines the effect of alternative digital lending provided by BigTech and FinTech firms on bank performance using cross-country and bank-level data. Using a sample of 67 developed and developing countries, we document a negative relationship between this type of digital lending and banking industry performance. The results are economically meaningful because a one-standard-deviation increase in alternative digital credit implies, on average, an 18.08% and 23.27% decrease in the return on assets (ROA) and net interest margin (NIM) of the banking system, respectively. These effects are larger in countries with less stringent banking regulations and less solid banking sectors, and in developing countries. Using bank-level data from 6205 commercial banks, we also show that the negative effect is observed on ROAs and NIMs at the bank level. Furthermore, we demonstrate that the growth in alternative digital lending negatively affects banking credit, suggesting a substitution effect. The findings remain robust after controlling for endogeneity issues and conducting several robustness tests.