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

Journal: Review of Financial Studies

Date: 20221101

Author: Gopal, Manasa; Schnabl, Philipp

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.

Link: Google Scholar

Key Findings

Shift in Small Business Lending

Banks reduced lending after the 2008 financial crisis while nonbank lenders (finance companies and FinTech) increased lending, reaching 59% market share by 2016.

Lending Substitution

Nonbank lenders expanded precisely in regions where banks reduced lending, offsetting the decline in bank credit supply without disrupting overall lending levels.

No Real Economic Impact

The substitution from bank to nonbank lending had no significant effect on employment, wages, or business creation, suggesting successful credit market adaptation.

Evolution of Lending Market Share

  • Bank lending dropped by 26% between 2007-2010 and never fully recovered
  • Nonbank lenders increased market share to nearly 60% by 2016
  • Finance companies remained largest nonbank lenders with 55% growth 2010-2016
  • FinTech lenders emerged after 2010, accounting for one-third of nonbank growth

Lender Type Distribution 2016

  • Finance companies are dominant nonbank lenders with 3.7M loans
  • Banks made 4.9M total loans through 352 institutions
  • FinTech lenders grew from negligible presence to 270k loans
  • Average loan size: Banks ($122k), Finance Companies ($128-148k), FinTech ($94k)

Economic Outcomes 2007-2016

  • No significant difference in employment growth between high vs low bank-dependent regions
  • Wage growth remained consistent across regions regardless of lender composition
  • Business establishment growth unaffected by shift from bank to nonbank lending

Contribution and Implications

  • First comprehensive documentation of structural shift in small business lending from banks to nonbank lenders
  • Demonstrates resilience of credit markets through lender substitution during financial stress
  • Highlights growing importance of finance companies and FinTech in maintaining credit supply
  • Suggests bank regulation may have unintended consequence of spurring nonbank lending growth

Data Sources

  • Lending evolution chart based on Figure 1 panel A and Table 2 panel C showing loan origination changes 2006-2016
  • Lender distribution chart constructed from Table 1 and Table 2 panel A data on lender characteristics
  • Economic outcomes visualization derived from Table 9 showing real effects analysis 2007-2016