Technology, the nature of information, and fintech marketplace lending

The retail lending landscape has changed considerably over the past two decades, the most recent example being the rapid growth of online, or FinTech, lending to consumers and small businesses. This paper discusses how the boundary of the firm in the retail lending market is affected by advances in information technology that have turned what was previously soft information on borrower credit risk into encoded hard data that can be precisely transmitted across firms at a very low cost. The ability to collect and process information has become the critical resource for lending decisions, enabling entities with an advantage in producing information, such as technology firms, to compete in traditional retail lending activities. Efficiency can also be gained by relying more on hard data and firm specialization in a credit supply chain. Whether these changes favor hierarchical large banks or small start-up firms depends on their relative funding cost. In the aftermath of the financial crisis, an increase in banks? capital costs due to enhanced regulation is likely an important factor behind the faster growth of the new FinTech entrants. The need for funding to make loans means that the socially desirable objective of avoiding excessive credit contraction during economic downturns is better served in the current system by traditional banks, owing to their access to deposit insurance and the liquidity provided by the Federal Reserve. In sum, for the foreseeable future, banks will coexist as well as partner with FinTech lenders in the retail lending market. Banks? market share in loans to consumers and small businesses will likely fluctuate countercyclically.