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FinTech and banks: Strategic partnerships that circumvent state usury laws

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  • Elliehausen, Gregory
  • Hannon, Simona M.

Abstract

This paper investigates the role of interest rate regulation of consumer credit and institutional risk segmentation in FinTech lenders’ efforts to solicit new customers in the personal loan market. We find that strategic partnerships between FinTech companies and specialist banks target marginal-risk, near-prime and low-prime consumers, living in states with low interest rate ceilings for unsecured personal loans. In partnering with the specialist banks, the FinTech lenders are able to take advantage of federal preemptions from state rate ceilings to lend profitably to higher-risk consumers in states with low rate ceilings to compete in these markets. We also show that when these partnerships are restricted, finance companies increase their credit supply.

Suggested Citation

  • Elliehausen, Gregory & Hannon, Simona M., 2024. "FinTech and banks: Strategic partnerships that circumvent state usury laws," Finance Research Letters, Elsevier, vol. 64(C).
    • Handle: RePEc:eee:finlet:v:64:y:2024:i:c:s1544612324004173
    DOI: 10.1016/j.frl.2024.105387
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    References listed on IDEAS

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    More about this item

    Keywords

    Personal loans; Interest rate cap; FinTech;
    All these keywords.

    JEL classification:

    • 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
    • G4 - Financial Economics - - Behavioral Finance

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