Banks or Fintechs? A Roadmap for Regulation

In recent years, traditional banks have faced increasing competition from digital banks, fintechs, and big tech companies. This paper builds a framework to discuss optimal regulation within this more complex competitive landscape. To achieve this, we establish a model where banks compete with a single fintech. All players choose the degree of specialization. Banks hold a geographical advantage for some customers, while the fintech reaches all customers equally. Due to fixed costs, the market operates under imperfect competition, leading to parameter values where the regulator may seek to exclude non-bank intermediaries and others where the regulator may prefer to exclude banks, shifting intermediation exclusively to big tech companies. These distinct patterns align with observed competition in financial markets, where competition with big tech companies is intense in the customer business and less so in corporate lending. Our model contributes to the argument that, for certain types of lending, banking regulation tends to be overly restrictive towards non-bank intermediaries, resulting in significant welfare losses.