In the shadow of big tech lending

• Published in: China economic review Vol. 79; p. 101913
• Main Authors: Chen, Yanting, Dong, Yingwei, Hu, Jiayin
• Format: Journal Article
• Language: English
• Published: Elsevier Inc 01.06.2023
• Subjects: Big tech; car equity loans; FinTech lending; Non-bank financial institutions (NBFI); Traditional loans; G51; Non-bank financial institutions (NBFI); car equity loans; G21; G28; FinTech lending; Big tech; Traditional loans
• ISSN: 1043-951X; 1873-7781
• DOI: 10.1016/j.chieco.2022.101913

We investigate the impact of Big Tech lending on non-bank traditional lenders, which have a more overlapping clientele with Big Tech lenders than traditional banks. Our empirical methodology exploits geographical differences in Big Tech penetration ratios and adopts the instrumental variable (IV) approach using the FinTech payment adoption ratio and the distance to the Big Tech's headquarter. We find that the competition from Big Tech worsens the performance of branches facing stronger Big Tech competition by reducing the number of borrowers and the amount of loans. Moreover, branches in cities highly penetrated by Big Tech lending tighten the lending standard by reducing loan-to-value (LTV) ratios, measured as the approved loan amount per unit collateral value, while keeping the average collateral requirement unchanged. Our findings are consistent with the cream-skimming hypothesis that Big Techs possess better screening technology and reduce the quality of borrowers applying for traditional loans. Our results document novel changes in and responses of the non-bank traditional lending business in the Big Tech era. •We investigate the impact of Big Tech lending on a non-bank traditional lender with nationwide branches•Non-bank lenders have a more overlapping clientele with Big Techs than traditional banks•We exploit geographical differences in Big Tech penetration ratios and uses two instrumental•variables (IVs): FinTech payment penetration ratios and the distance to the Big Tech headquarter•We find that Big Tech competition weakens the performance of branches facing stronger Big Tech competition•The non-bank lender responds by tightening lending standards