discussion session on fintech and traditional banking · has ﬁntech displaced traditional...

DiscussionSession on Fintech and Traditional Banking

Kathleen Weiss Hanley

Lehigh University

17th FDIC-JFSR Fall Bank Research ConferenceSeptember 8, 2017

Kathleen Weiss Hanley Discussion: Fintech and Traditional Banking

Has fintech displaced traditional banking?

Collectively, these papers show a decline in traditionalbanking with the rise of fintechPredominantly in underserved areas of the countryRiskier applicant poolFintech may charge higher spreads than traditional banks(mixed) using traditional measuresUse of alternative information to assess credit quality


Crowding Out Banks: Credit Substitution byPeer-to-Peer Lending (Wolfe and Yoo)

Banks experience a 1.3% decrease in volume of personalloans (LendingClub and Prosper) for a 1 std dev increasein P2P lending in their marketSmaller banks, particularly in rural areas, have greaterdeclinesFrom a regulatory perspective, is this good or bad?In OLS results, evidence of greater charge-offs but notdelinquenciesCleaning of the books?Paper exploits heterogeneity in state regulation toovercome potential causality


Origination process


Regulatory framework

Actual regulatory framework more complex than in paperRegulators involved in both the origination of loan and saleto investors

Origination: Circumvent some state licensing regulation byusing a funding bank

“We rely on WebBank to originate loans to qualifiedborrowers throughout the United States and sell and assignthose loans to PFL. If our relationships with WebBank wereto end, we may need to rely on individual state lendinglicenses to originate Borrower Loans.”

Sale to investors: Comply with state securities regulatorsApproval is for the security, not the company


Clarity in state regulation

State securities registration may not be appropriate proxyfor permissibility of lending activitiesDetermine whether platform outsources state licensingExploit the fact that adoption of fintech by borrowers notuniform across all states


Geography of loans for LendingClub (Jagtiani andLemieux)

Figure: 2010 Figure: 2016


Fintech Lending: Financial Inclusion, Risk Pricing, andAlternative Information (Jagtiani and Lemieux)

As with Wolfe and Yoo, LendingClub originates loans forcredit card and debt consolidation in areas with lower bankconcentrationThese loans are made to lower credit quality borrowers asmeasured by DTI and FICOUses detailed loan data from Y-14M data reported by largebanks


Alternative information

LendingClub appears to be changing composition of loanratings throughout the sample period in terms of FICOscore

In 2007, FICO of 750 rated A or B, by 2015, could be ratedA-D

Reverse is also true, FICO scores of less than 680 neverassigned A/B in 2007 but are in all rating categories by2015Pattern used as evidence of use of alternative informationby LendingClubDue to change in high FICO scores in pool or methodologyused to assign ratings?


Spreads and default rates

Finds LendingClub spreads correlates highly with ratingsand probability of defaultSomewhat circular relationship

Lower credit rating indicates lower ability to repayRates are higher for low-rated loans to compensate forprobability of defaultHigher rates for borrowers with limited ability to pay leads tohigher defaults


Federal Reserve Y-14M reports

Proprietary loan level data for large banks subject to stresstestsAbility to determine whether LendingClub’s loanperformance is similar to traditional banksPaper compares default rates by spread but this may beendogenously determinedConcludes “for same risk of default, consumers paysmaller spreads on loans from LendingClub than fromtraditional lending channels”However, this conclusion is not obvious and many notcontrol for other characteristics that determine spreadsPropensity score loans in traditional bank portfolios withthose in LendingClub


Fintech, Regulatory Arbitrage, and the Rise of ShadowBanks (Buchak, Matvos, Piskorski and Seru)

Mortgage lending by traditional and shadow banks(non-fintech and fin-tech) on the riseAs with personal loans, shadow banks prevalent inunderserved areasRates charged by fintech greater than traditional banksPremise is that regulatory pressure has resulted inpull-back by traditional banks


Differences in information

Fintech rates are not as reliant on FICO, LTV as othershadow banksConclusion is that fintech uses substantially less hardinformation suggesting technology is the differentiatingfactor.Alternative explanation

Lack of access to traditional banks may allow market powerin pricingResidents of poor neighborhoods must travel more than twomiles to have access to the same numbers ofsupermarkets, large drug stores, banks, and other types ofstores as residents of nonpoor areas. (Alwitt and Donley,1997)

Consider PSM on characteristics other than FICO and LTV


Regulatory pressure

Results are suggestive of regulatory pressureCounties where bank capital ratios increase mostexperience increase in shadow bank lendingAfter Basel III finalized, counties with banks that havegreater capital based on MSR have greater shadowbanking growthCounties with greater lawsuit exposure for banks have anincrease in shadow bank market share

Pinpoint regulatory changes more directlyNot clear why capital ratios may have increased

Shrinking assets rather than increases in equity?


Decline in mortgage lenders

Lack of discussion of change in number of providers ofmortgages after financial crisisIs Quicken Loans simply a new version of Countrywide?


What makes fintech attractive to borrowers?


Overcoming bias

Within finance, theories suggest that financialintermediation provides value through the ability togenerate information about borrowersDark side of relationship banking may be conscious orunconscious biasWithin shadow banks, fintech makes more loans tominorities and womenThis may make fintech more attractive to individuals whomay be concerned about biasIf online lending uses an algorithm, bias is discoverableand intent possibly inferred


Will traditional banking become more like fintech?

Traditional banking slow to adopt technology-why?Regulatory frictionsBank culture

Barrier to entry into fintech for traditional banking does notseem highIndeed partnerships are common “ According toAccenture, in 2015, 35 percent of FinTech investmentswere in collaborative technologies that advance thecapabilities and efforts of financial institutions. ”


Will fintech become more like traditional banking?

”Last week, the San Francisco provider of student and personalloans submitted an application for federal deposit insurance, aprotection normally available only to conventional banks. In itsapplication, the company said its SoFi Bank subsidiary will offerbread-and-butter banking products, including checkingaccounts, debit cards and eventually credit cards.”

—‘Fintech’ start-up SoFi is moving into traditional banking, LA Times,June 13, 2017


discussion session on fintech and traditional banking · has ﬁntech displaced traditional...

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