The Rise of Finance Companies and FinTech Lenders in Small Business Lending

Abstract

We document that finance companies and FinTech lenders increased lending to small businesses after the 2008 financial crisis. We show that most of the increase substituted for a reduction in bank lending. In counties in which banks had a larger market share before the crisis, finance companies and FinTech lenders increased their lending more. We find no effect of reduced bank lending on employment, wages, and new business creation by 2016. Our results suggest that finance companies and FinTech lenders are major suppliers of credit to small businesses and played an important role in the recovery from the 2008 financial crisis.

The Real Effects of FinTech Lending on SMEs: Evidence from Loan Applications

“…This in turn raises the liquidation value of firms, relaxes their bank borrowing constraint, and makes bank debt cheaper. Our results about the increase in bank debt and decrease in the cost of bank debt, jointly considered with the observed growth in firm size, thus suggest that P2B lending may be playing the role that market debt has in Crouzet (2018) offering at the regional or county level, several papers suggest that FinTech took over traditional financial intermediaries' market share when it comes to business lending (see Gopal and Schnabl (2020), Balyuk, Berger, andHackney (2020), and). Large banks reduced the lending to small businesses as they faced strong regulatory burdens and hefty losses, leaving room for FinTech lenders.…”

“…Chen, Hanson, and Stein (2017) argue that after the 2007-2009 financial crisis, large banks reduced the lending to small business as they faced strong regulatory burdens and losses, leaving room for non-bank lenders. Gopal and Schnabl (2020) find a substitution effect due to the reduction in the supply of credit to SMEs by banks. They find that the reduction in bank lending in the aftermath of 2007-2009 financial crises was almost perfectly offset by an increase in lending by non-bank lenders, especially independent finance companies.…”

Regulatory constraint and small business lending: do innovative peer-to-peer lenders have an advantage?

“…4 We build on a growing body of literature. Gopal and Schnabl (2022) address a similar question to us but from the perspective of a shock (based on balance sheet impact of accounting rule FAS 166/167) and their definition of FinTech lender 5 is very different from ours. They highlight that the total small business loans held on the balance sheet of the 10 largest banks in 2016 was $10.28 billion.…”

Fintech Lending Under Austerity

“…First, our paper is relevant to the fast growing literature on the impact of FinTech on credit markets. A large body of this literature is dedicated to understanding whether FinTech platforms lend more cheaply or provide better products compared to traditional lenders such as banks (Buchak et al, 2018;Tang, 2019;Balyuk et al, 2020;Erel and Liebersohn, 2020;Thakor, 2020;Berg et al, 2021;de Roure et al, 2021;Gopal and Schnabl, 2022). Several related studies explore the technological advantages that FinTech lenders have over traditional ones, and whether they can be effective in reducing search and intermediation frictions in the loan origination process (Bartlett et al, 2021;Fuster et al, 2019Fuster et al, , 2021.…”