Technology, the Nature of Information, and FinTech Marketplace Lending
Over the past 25 years, the retail lending market has undergone marked changes, many of which have been enabled by technological advances which have transformed the way that information is collected and analyzed to make decisions on consumer loans. Before this information technology (IT) revolution, loan officers, often at banks, would gather "soft" information about a potential borrower through direct interactions with the applicant, but by the mid-1990s this was largely replaced by credit bureau data, assembled primarily from digitized "hard" information about an individual's repayment history. IT's role in converting financial information from "soft" to "hard" data that can be precisely disseminated at a very low cost is a development that has altered the provision of consumer credit from the traditional bank-based model—where approving, funding, and servicing loans are tasks integrated within the same firm—to one where different firms can specialize in originating or funding loans along a credit supply chain. Because the critical component for lending decisions now revolves around the ability to create and utilize a large volume of data effectively, this change has enabled firms with a competitive advantage in generating and processing information to compete with traditional lenders.
Since 2007 a growing portion of the retail lending industry centers on FinTech, stand-alone firms that operate through online platforms and use advanced IT applications to provide financial services to consumers and small businesses. Other technology-focused firms also have data capabilities that can be applied to the retail lending market. Compared to banks, FinTech lenders have some competitive advantages: operating exclusively through an internet platform eliminates the costly need for brick-and-mortar retail locations, while their extensive IT infrastructure delivers financial services with efficiency, speed, and convenience. This paper uses FinTech firms as a case study to explore how IT changes can alter the boundary of what are regarded as financial firms, how this evolution impacts consumer lending activity more generally, and what these developments imply for financial stability in the long term.