Research

The expansion of BigTech platforms into credit markets raises a natural question: how does competition from a data-rich entrant affect the information acquisition, pricing, and portfolio composition of incumbent banks? We formalize this through a sequential credit-market model in which a bank invests in costly screening and competes with an entrant digital platform whose informational advantage improves with the level of platform adoption. Better platform information facilitates the selection of attractive borrowers and can result in a riskier bank portfolio, while the incumbent responds through screening and repayment rates to defend contestable borrowers. As a result, platform entry need not increase bank risk. The ultimate effect depends greatly on the bank's funding costs. Particularly, when these costs are sufficiently high, the bank may see a sharp increase in the riskiness of its loan portfolio. The paper therefore links digital credit competition to the endogenous reallocation of borrower risk across intermediaries, and its welfare implications.