Bankers were right about fintech: its regulatory arbitrage
Fintech is winning because of regulatory arbitrage and fintechs are dependent on US government bailouts to sustain their lending, a shocking new study has found.
Bankers have long complained that fintech has smokeballed into financial services through regulatory arbitrage and that regulators have let fintechs act like banks without regulating them like banks.
A new study published by NBER, the powerful US government economic advisor, gives body to the bankers’ complaints.
The study, ‘Fintech, Regulatory Arbitrage and the rise of Shadow Banks’, found that the success of “shadow banking” – a broad category for non-bank lending, which includes fintech – correlates closely with banks being shut out by regulation.
But more shockingly, it claims that fintech lending only works at all because the industry feels confident that it will be bailed out by the US government.
“While fintech lenders do fill the entrepreneurial gap left by the banks, they have relied almost exclusively on explicit and implicit government guarantees,” the study said.
“By 2015, more than 80% of loans originated by fintech lenders were loans with some form of government guarantee.
“Overall, these results suggest that shadow banks are much more reliant on government guarantees… relative to traditional banks.”
Fintechs depend on bailouts because they do not have a depositary base to cover their lender’s’ assets. This suggests that they are relying on the US government’s sweeping deposit guarantee to save their lenders in a financial crisis.
The evidence for regulatory arbitrage, the study says, is that fintech has succeeded most where banks have felt the regulators’ sting.
“Shadow bank lenders expand among borrower segments and geographical areas in which regulatory burdens have made lending more difficult for traditional, deposit-taking banks,” it said.
Contrary to common wisdom that technology lowers transaction costs, the study found that fintechs are more expensive than traditional lenders.
It suggested that fintechs get away with charging higher interest rates because customers are willing to pay for the convenience of borrowing online.