FinTech and banks: Strategic partnerships that circumvent state usury laws

Gregory Elliehausen and Simona M. Hannon

Finance Research Letters, 2024, vol. 64, issue C

Abstract: This paper investigates the role of interest rate regulation of consumer credit and institutional risk segmentation in FinTech lenders’ efforts to solicit new customers in the personal loan market. We find that strategic partnerships between FinTech companies and specialist banks target marginal-risk, near-prime and low-prime consumers, living in states with low interest rate ceilings for unsecured personal loans. In partnering with the specialist banks, the FinTech lenders are able to take advantage of federal preemptions from state rate ceilings to lend profitably to higher-risk consumers in states with low rate ceilings to compete in these markets. We also show that when these partnerships are restricted, finance companies increase their credit supply.

Keywords: Personal loans; Interest rate cap; FinTech (search for similar items in EconPapers)
JEL-codes: G21 G23 G4 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:64:y:2024:i:c:s1544612324004173

DOI: 10.1016/j.frl.2024.105387

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