« Welfare Effects of Open Banking ; Data Versus Collateral »

Abstract :
Open banking can alter the information structure of credit markets by furnishing fintechs with more financial data on their customers and hence enhancing their screening capabilities. We investigate the welfare implications of open banking by constructing a model of a loan market with adverse selection. In this market, a fintech, reliant on information technology to assess borrowers’ credibility, competes with a traditional bank that employs collateral to differentiate between various borrower types. We find that enhancing the fintech’s monitoring capacity through the provision of free access to borrowers’ information may not necessarily lead to improved welfare. This suggests that complete data sharing (i.e., granting the fintech full access to borrowers’ data) is not always the optimal solution and could potentially reduce welfare. Specifically, when the bank is sufficiently proficient in utilizing collateral, partial data sharing might be the preferred option.