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

Author

Listed:
  • Brett Barkley

    (Federal Reserve Bank of Cleveland)

  • Mark Schweitzer

    (Federal Reserve Bank of Cleveland)

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. To assess how fintech firms' entry is altering the choices and outcomes of small businesses that borrow from them, we analyze data from the Federal Reserve's Small Business Credit Survey, a unique data source on the experiences of business owners with new and traditional sources of credit. We find that fintech lenders have substantially expanded the small business finance market by reaching borrowers less likely to be served by traditional lenders and that businesses using online lenders are younger, smaller, and less profitable than the average small or medium-sized enterprise in the United States. After controlling for compositional differences between online and bank borrowers, we find that businesses using fintech lenders generally apply for smaller loan amounts but value the option of fintech loans. Businesses that receive fintech loans expect more revenue and employment growth than those receiving a bank loan; however, they are less satisfied than businesses that borrow from banks but more satisfied than businesses that were denied credit.

Suggested Citation

  • Brett Barkley & Mark Schweitzer, 2021. "The Rise of Fintech Lending to Small Businesses: Businesses' Perspectives on Borrowing," International Journal of Central Banking, International Journal of Central Banking, vol. 17(1), pages 35-65, March.
    • Handle: RePEc:ijc:ijcjou:y:2021:q:1:a:2
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    References listed on IDEAS

    as
    1. Jagtiani, Julapa & Lemieux, Catharine, 2018. "Do fintech lenders penetrate areas that are underserved by traditional banks?," Journal of Economics and Business, Elsevier, vol. 100(C), pages 43-54.
    2. Berger, Allen N. & Miller, Nathan H. & Petersen, Mitchell A. & Rajan, Raghuram G. & Stein, Jeremy C., 2005. "Does function follow organizational form? Evidence from the lending practices of large and small banks," Journal of Financial Economics, Elsevier, vol. 76(2), pages 237-269, May.
    3. 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.
    4. 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.
    5. Courtney M. Carter & Traci L. Mach & Cailin R. Slattery, 2014. "Peer-to-peer lending to small businesses," Finance and Economics Discussion Series 2014-10, Board of Governors of the Federal Reserve System (U.S.).
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    Citations

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    Cited by:

    1. Tobias Berg & Andreas Fuster & Manju Puri, 2022. "FinTech Lending," Annual Review of Financial Economics, Annual Reviews, vol. 14(1), pages 187-207, November.
    2. Angela Guo & Mark E. Schweitzer, 2023. "Basic Facts on the Coverage of the Paycheck Protection Program," Working Papers 23-24, Federal Reserve Bank of Cleveland.
    3. Gaffney, Edward & Hennessy, Christina & McCann, Feargal, 2022. "Non-bank mortgage lending in Ireland: recent developments and macroprudential considerations," Financial Stability Notes 3/FS/22, Central Bank of Ireland.
    4. Brett Barkley & Mark E. Schweitzer, 2022. "Credit Availability for Minority Business Owners in an Evolving Credit Environment: Before and During the COVID-19 Pandemic," Working Papers 22-18, Federal Reserve Bank of Cleveland.
    5. Nisha Mary Thomas, 2023. "Modeling key enablers influencing FinTechs offering SME credit services: A multi-stakeholder perspective," Electronic Markets, Springer;IIM University of St. Gallen, vol. 33(1), pages 1-27, December.
    6. Brett Barkley & Mark Schweitzer, 2023. "Credit Availability for Minority Business Owners in an Evolving Credit Environment," Economic Development Quarterly, , vol. 37(3), pages 230-242, August.

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    More about this item

    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
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • 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

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