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The Rise of Fintech Lending to Small Businesses: Businesses’ Perspectives on Borrowing

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  • Brett Barkley
  • Mark E. Schweitzer

Abstract

Online lending through fintech firms is a rapidly expanding segment of the financial market that is receiving much attention from investors and increasing scrutiny from regulators. Research is only beginning to assess how fintech firms’ entry is altering the choices and outcomes of small businesses that borrow from them. The Federal Reserve Small Business Credit Survey is a unique data source on the experiences of business owners with new and more traditional sources of credit. We find that the businesses using online lenders are not representative of small and medium-size enterprise in the US. Businesses borrowing online are younger, smaller, and less profitable. Through reaching borrowers less likely to be served by traditional lenders fintech lenders have substantially expanded the small business finance market. We apply treatment effects estimators to flexibly control for composition differences in the borrowers. After controlling for compositional differences between online and bank borrower, we find that loan application amounts are generally smaller with fintech lenders; businesses that receive fintech loans expect more revenue and employment growth than those receiving a bank loan; and businesses that borrow from banks are more satisfied than businesses that borrow online, which are still more satisfied than businesses who were denied credit. These results highlight issues that the financial industry and regulators should examine as fintech lending to small businesses continues to expand.

Suggested Citation

  • Brett Barkley & Mark E. Schweitzer, 2020. "The Rise of Fintech Lending to Small Businesses: Businesses’ Perspectives on Borrowing," Working Papers 20-11, Federal Reserve Bank of Cleveland.
    • Handle: RePEc:fip:fedcwq:87704
    DOI: 10.26509/frbc-wp-202011
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    References listed on IDEAS

    as
    1. DeYoung, Robert & Glennon, Dennis & Nigro, Peter, 2008. "Borrower-lender distance, credit scoring, and loan performance: Evidence from informational-opaque small business borrowers," Journal of Financial Intermediation, Elsevier, vol. 17(1), pages 113-143, January.
    2. Allen N. Berger & Gregory F. Udell, 2002. "Small Business Credit Availability and Relationship Lending: The Importance of Bank Organisational Structure," Economic Journal, Royal Economic Society, vol. 112(477), pages 32-53, February.
    3. Robert DeYoung & W. Frame & Dennis Glennon & Peter Nigro, 2011. "The Information Revolution and Small Business Lending: The Missing Evidence," Journal of Financial Services Research, Springer;Western Finance Association, vol. 39(1), pages 19-33, April.
    4. Guido W. Imbens, 2004. "Nonparametric Estimation of Average Treatment Effects Under Exogeneity: A Review," The Review of Economics and Statistics, MIT Press, vol. 86(1), pages 4-29, February.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    fintech; Small business lending; firm growth; online alternative lenders;
    All these keywords.

    JEL classification:

    • C31 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models; Quantile Regressions; Social Interaction Models
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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