Please rotate your device to landscape mode to view the charts.

Can FinTech Reduce Disparities in Access to Finance? Evidence from the Paycheck Protection Program

Journal: Journal of Financial Economics

Date: 20221001

Author: Erel, Isil; Liebersohn, Jack

Abstract:
New technology promises to expand the supply of financial services to small businesses poorly served by banks. Does it succeed? We study the response of FinTech to financial services demand created by the introduction of the Paycheck Protection Program. FinTech is disproportionately used in ZIP codes with fewer bank branches, lower incomes, and more minority households, and in industries with fewer banking relationships. It is also greater in counties where the economic effects of the COVID-19 pandemic were more severe. Substitution between FinTech and banks is economically small, implying that FinTech mostly expands, rather than redistributes, the supply of financial services.

Link: Google Scholar

Key Findings

FinTech Serves Underserved Areas

FinTech lenders disproportionately provided PPP loans in ZIP codes with fewer bank branches, lower incomes, and larger minority populations

Limited Substitution Effect

Only 27% of decreased traditional bank lending was replaced by FinTech lending, suggesting FinTech expanded rather than redistributed credit access

Higher COVID Response

FinTech lenders were approximately 10x more responsive to areas with severe COVID-19 economic impacts compared to traditional banks

FinTech Lending by Demographics

  • Areas with fewer bank branches received 17% of loans from FinTech vs 13% in high-branch areas
  • Lower income ZIP codes had 17% FinTech share vs 13% in higher income areas
  • Areas with lower white population percentage had 17% FinTech share vs 13% in majority white areas

Traditional vs FinTech COVID-19 Response

  • FinTech lenders showed a 4.72 coefficient response to COVID case rates
  • Traditional banks showed only a 0.48 coefficient response
  • FinTech was approximately 10x more responsive to areas with higher COVID impact

Substitution Between Bank and FinTech Lending

  • For every 15 fewer traditional bank PPP loans, FinTech increased by only 4 loans
  • Only 27% substitution rate between traditional and FinTech lending
  • Suggests FinTech largely expanded rather than redistributed credit access

Contribution and Implications

  • First systematic study comparing traditional banks and FinTech lenders in government-backed lending programs
  • Demonstrates FinTech's potential to increase financial inclusion in underserved areas
  • Supports expanding FinTech participation in government loan programs beyond crisis periods
  • Highlights need to balance increased access with appropriate oversight of online lending

Data Sources

  • Demographics chart based on Table 3 showing relationship between bank branches, income, demographics and FinTech lending
  • COVID response visualization based on Table 2 coefficients comparing traditional and FinTech lending response to COVID-19
  • Substitution chart constructed from Table 10 showing effects of predicted bank lending on actual lending volumes