How Disruptive is Financial Technology?

TL;DR

This paper investigates how Fintech influences traditional banks by increasing deposit costs and competition, revealing that Fintech can both challenge and stabilize banking liquidity depending on bank size and diversification.

Contribution

It provides empirical evidence on Fintech's impact on deposit rates and liquidity, highlighting the role of bank size and diversification in mitigating competitive pressures.

Findings

Deposit costs increase by approximately 11.5% due to Fintech competition.

Size and diversification help banks mitigate deposit drain.

Fintech's growth has complex effects on banking stability.

Abstract

We study whether Fintech disrupts the banking sector by intensifying competition for scarce deposits funds and raising deposit rates. Using difference-in-difference estimation around the exogenous removal of marketplace platform investing restrictions by US states, we show the cost of deposits increase by approximately 11.5% within small financial institutions. However, these price changes are effective in preventing a drain of liquidity. Size and geographical diversification through branch networks can mitigate the effects of Fintech competition by sourcing deposits from less competitive markets. The findings highlight the unintended consequences of the growing Fintech sector on banks and offer policy insights for regulators and managers into the ongoing development and impact of technology on the banking sector.