Collateral Effects: The Role of FinTech in Small Business Lending

Publication Date
Financial Markets Group Discussion Papers DP 900
Publication Authors

This paper investigates the impact of introducing junior unsecured loans (i.e., FinTech loans) in the small business lending market. Using French administrative data, we find that FinTech borrowers experience a 20% increase in bank credit following FinTech loan origination. We establish causality using a shift-share instrument exploiting firms’ differential exposure to banks’ collateral requirements. The credit expansion only occurs when FinTech borrowers invest in new assets, and Fintech borrowers are subsequently more likely to pledge collateral to banks. This suggests that firms use FinTech loans to acquire assets that they then pledge to banks, thereby increasing their total borrowing capacity.