When FinTech Competes for Payment Flows

We study the impact of FinTech competition in payment services when banks rely on consumers' payment data to obtain information about their credit quality. Competition from FinTech payment providers disrupts this information spillover to the credit market, reducing the bank's profit and the quality of its loans. Consumers with weak bank affinity benefit from FinTech competition (financial inclusion improves), whereas consumers with strong bank affinity may instead be worse off. Information from payment data flows back into the credit market if FinTech firms either directly make loans or sell consumer data to the bank, or if consumers themselves port their data to the bank. All three regimes improve the quality of loans, although their effects for bank profit and consumer welfare are ambiguous. Our results highlight the important and complex trade-off between consumer welfare and the stability of banks following FinTech competition in payment.