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FinTech and the New Financial Landscape

Paper Session

Saturday, Jan. 6, 2018 2:30 PM - 4:30 PM

Loews Philadelphia, Lescaze
Hosted By: Association of Financial Economists
  • Chair: Julapa Jagtiani, Federal Reserve Bank of Philadelphia

Block Chain Disruption and Smart Contracts

Lin William Cong
,
University of Chicago
Zhiguo He
,
University of Chicago

Abstract

Decentralized ledger technologies such as blockchains feature decentralized consensus as well as low-cost, tamper proof algorithmic executions, and consequently enlarge
the contracting space and facilitate the creation of smart contracts. Meanwhile, the
process of reaching decentralized consensus changes the informational environment.
We analyze how these fundamental features reshape industry organization and the
landscape of competition. Smart contracts can mitigate information asymmetry and
deliver higher social welfare and consumer surplus through enhanced entry and compe-
tition, yet blockchain may also encourage collusion. In general, blockchain and smart
contracts can sustain market equilibria with a larger range of economic outcomes. We
further characterize smart contracts used in equilibrium and discuss anti-trust policy
implications, such as injecting noise into certain consensus record and encouraging
platform competition.

Fintech Lending: Financial Inclusion, Risk Pricing , and Alternative Information

Julapa Jagtiani
,
Federal Reserve Bank of Philadelphia
Cathy Lemieux
,
Federal Reserve Bank of Chicago

Abstract

Fintech has been playing an increasing role in shaping financial and banking landscapes. Banks have been concerned about the uneven playing field because fintech lenders are not subject to the same rigorous oversight. There have also been concerns about the use of alternative data sources by fintech lenders and the impact on financial inclusion. In this paper, we explore the advantages/disadvantages of loans made by a large fintech lender and similar loans that were originated through traditional banking channels. Specifically, we use account-level data from the LendingClub and Y-14M bank stress test data. We find that LendingClub’s consumer lending activities have penetrated areas that lose bank branches and in those in highly concentrated banking markets. LendingClub borrowers are, on average, more risky than traditional borrowers given the same FICO scores. We also find a high correlation between interest rate spreads, LendingClub rating grades, and loan performance. However, the correlations between the rating grades and FICO scores (at origination) have declined from about 80 percent (for loans that were originated in 2007) to only about 35 percent for recent vintages (originated in 2014-2015) -- indicating that alternative data has been increasingly used. The use of alternative information sources has allowed some borrowers who would be classified as subprime by traditional criteria to be slotted into “better” loan grades and therefore get lower priced credit. Also, for the same risk of default, consumers pay smaller spreads on loans from the LendingClub than from credit card borrowing.

FinTech and Financial Innovation: Drivers and Depth

John W. Schindler
,
Federal Reserve Board

Abstract

This paper answers two questions that help those analyzing FinTech understand its origins, growth, and potential to affect financial stability. First, it answers the question of why "FinTech" is happening right now. Many of the technologies that support FinTech innovations are not new, but financial institutions and entrepreneurs are only now applying them to financial products and services. Analysis of the supply and demand factors that drive "traditional" financial innovation reveals a confluence of factors driving a large quantity of innovation. Second, this paper answers the question of why FinTech is getting so much more attention than traditional innovation normally does. The answer to this question has to do with the 'depth' of innovation, a concept introduced in this paper. The deeper an innovation, the greater the ability of that innovation to transform financial services. The paper shows that many FinTech innovations are deep innovations and hence have a greater potential to change financial services. A greater potential to transform can also lead to a greater chance of affecting financial stability.
Discussant(s)
Andreas Park
,
University of Toronto
Joseph Hughes
,
Rutgers University
Larry D. Wall
,
Federal Reserve Bank of Atlanta
JEL Classifications
  • G2 - Financial Institutions and Services
  • O3 - Innovation; Research and Development; Technological Change; Intellectual Property Rights