Critically assessing the empirical research on FinTech credit markets

Nicola Branzoli – Bank of Italy;

Ilaria Supino – Bank of Italy

-- Technology-enabled innovation in financial services, or FinTech for short, has progressed rapidly over the past few years. The surge in the use of internet for the distribution of financial products and the advancement of digital technologies, such as Artificial Intelligence (AI) and application programming interfaces (API), have helped introduce a variety of innovations in the financial sector, prompting the entry of new players and forcing market incumbents to rethink their business models.

In an attempt to organize the growing literature on research topics that fall under the label of FinTech (Morse, 2015; Thakor, 2019), our recent work, “Fintech credit: a critical review of the empirical literature,” offers a novel, critical assessment of the empirical literature on the development and functioning of FinTech credit markets.

We organize the literature around three main topics. First, we review articles that investigate the drivers underpinning the worldwide rise of FinTech credit, discussing the role of demand-and- supply-side factors in explaining the expansion of digital lending. Second, we look into recent research on the use of new data and techniques made available by technological advancements in the financial industry, with a view to understand whether and to what extent Big Data (BD) and AI reduce informational asymmetries between lenders and borrowers and facilitate better credit risk assessment. Third, we focus on studies that explore whether FinTech lending is conducive to a broader and easier access to financing.

Our review provides four broad insights. FinTech credit grows more in wealthier regions and in areas with lower bank competition. The availability of ‘alternative’ data (i.e. data retrieved from non-traditional sources of information such as social networks and websites) improves access to finance for opaque borrowers. Risk assessment models based on new techniques perform better than traditional ones. Finally, FinTech borrowers tend to be riskier than traditional banks’ borrowers.

Our review finds that a wider diffusion of FinTech could yield a number of benefits in credit markets, mostly in terms of enhanced financial inclusion and reduced information asymmetries. However, we also warn that there is little and conflicting evidence on whether new digital technologies can actually improve the pricing of risk in the economy. Indeed, while BD and AI can reduce information asymmetries between borrowers and lenders, they can also improve the ability of lenders to price-discriminate borrowers and charge higher interest rates to those with higher willingness to pay.

All in all, the actual effects related to the use of new technologies for credit provision are still unclear and have yet to be tested through a full financial cycle. At the current juncture, when the financial market landscape is rapidly evolving in response to the crisis generated by the spread of the Covid-19 pandemic, further research on the adoption of digital finance by households and firms (as well as on its impact on the structure of financial intermediation) is still needed.

Disclaimer: the views expressed herein are those of the authors and do not necessarily reflect those of the Bank of Italy.

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