Lending and monitoring: Big Tech vs Banks

We show that by lending to merchants and monitoring them, an e-commerce platform can price-discriminate between merchants with high and low financial constraints: the platform offers credit priced below market rates and designed to select merchants with lower capital or collateral while simultaneously increasing the platform’s access fees. The credit market then becomes endogenously segmented with banks focusing on less financially constrained borrowers. Lending by the platform expands with its monitoring efficiency but can arise even when the platform is less efficient than banks at monitoring. Platform credit benefits more financially constrained merchants as well as buyers, but can hurt less financially constrained merchants if cross-side network effects with buyers are too small. The platform’s propensity to offer credit and the financial inclusion of more constrained merchants depends on the platform’s market power.