Have the giant e-commerce lenders overcome local banks' relationship and soft information advantage?

Oskar Kowalewski, IESEG School of Management and Institute of Economics, Polish Academy of Sciences;

Paweł Pisany, Institute of Economics, Polish Academy of Sciences

-- Technology has always set the conditions of running a business; in particular, the current fast development of information and communication technologies (ICT) and data availability influence the perspectives of financial markets. Financial technology (“fintech”) is currently gaining momentum in the business world. Meanwhile, there is a growing discussion about the potentially disruptive impact of giant technology (“bigtech”) companies (“bigtechs”), such as e-commerce platforms entering the financial markets. While there have been some empirical studies on fintech, most focus only on a particular provider. New reliable cross-country data have only recently emerged that allow for in-depth empirical studies of the nature of competition between fintech companies (“fintechs”) and banks. Moreover, we know even less about experiences related to the emergence of bigtech credit. This study offers some empirical insights in this field using bank-level data and country-level proxies for fintech and, even more importantly, bigtech credit.

Technological innovation opens up the possibility of provisioning financial services using new categories of non-banking entities. Thus, a new type of competitors for banks have emerged that are potentially very strong but, more importantly, poorly regulated and supervised. We consider this area to be of crucial importance today. How does such competition affect banks? Which banks are particularly exposed to this new competition? Do fintech and bigtech credit, as alternative tech-based lending, affect banks in the same way, or do they have a different potential impact on the banking sector? In our recent paper, “Banks’ consumer lending reaction to fintech and bigtech credit emergence in the context of soft versus hard credit information processing,” we try to shed new light on the above-mentioned issues from an empirical perspective with data appropriate for this kind of study that have become available today. To the best of our knowledge, our latest study is the first to explore separately bigtechs and fintechs’ competition with banks in an empirical bank-level study.

We analyze competition in the consumer lending segment between banks, on the one hand, and fintech and bigtech credit providers, on the other. We use a database combining bank-level characteristics and country-level proxies for fintech and bigtech credit from 72 countries during 2013–2018, resulting in over 14,000 bank-year observations. We also include information on bank ownership type. We find that in developed markets, the relations between fintech/bigtech credit providers and banks are similar and competitive.

However, we find that banks’ consumer lending grows simultaneously with fintech credit market development in emerging economies but decreases in the aftermath of bigtech credit emergence. Fintech credit seems to penetrate market segments not serviced by banks; thus, it plays a complementary role but only in emerging economies. Bigtechs compete even more with banks and are able to push some banking offers out of the market, both in emerging and developed economies.

Furthermore, we show that domestic and privately-owned banks are more negatively affected by competition from tech-based lending, particularly bigtechs, compared to foreign banks. Thus, we claim that in modern economies, bigtech lending may be treated as a competition for relationship lending provisioned by local banks, based mostly on soft credit data processing.

We highlight some differences between high- versus low- and middle-income countries: fintechs, as complementary offer providers, may be seen as supporters of financial inclusion in emerging economies; in contrast, bigtechs are potential competitors for banks in all countries.

The unprecedented informational advantage of bigtechs over other lenders and the highest analytical competences, including the use of artificial intelligence and machine learning, allow bigtech credit providers to develop effective credit scoring tools (plus distribution channels); these can act as equivalent of market feeling used by local banks. Thus, bigtechs may question the positions of small local banks. In other words, bigtechs compete with local, small, private banks effectively as these banks no longer have a competitive advantage in soft credit information processing and relationship lending. Banks have lost this advantage to technology companies, mainly e-commerce platforms, that have huge sets of alternative data both on individuals seeking products and companies selling products.

In the potential scenario of flourishing growth of tech-based lending, fintech, and bigtech credit, which are the competition primarily for local banks, the question of stability of this new type of lending should be asked. After all, bigtech is a highly concentrated market. Next, attention should be paid to the challenges related to market competition and consumer protection as well as transparency and fairness in personal data use. Finally, we need to re-assess the role of bigtechs in financial inclusion, as their positive impact may be an illusion.


This research was supported by the National Science Center (NCN), Poland, under grant no. OPUS 15 no. 2018/29/B/HS4/00594.

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