Events

Fintech can help bypass financial intermediaries and offer financial services directly to users. Its nature of disintermediation raises questions on whether the regulation of a disintermediated Fintech market is needed and how it should be different from the traditional financial regulation, which has moral hazard of financial intermediaries as the key consideration. Using data from the world’s largest peer-to-peer (P2P) lending market – China, we show that without proper regulation framework, market participants inefficiently simplify risk assessment in the credit creation process, leading to market failures. The market failures coincided with broadened market participation from non-intermediaries. We also find that P2P lending with broad market participation did not help facilitate financial inclusion. The results suggest that the heterogeneity of market participants accompanying the broad participation could lead to adverse selection. Investors and platforms with proper risk assessment could either be forced out or choose to pool with lax risk assessment. Overall, our findings suggest that a disintermediated Fintech market needs to be properly regulated. Its regulation should focus on restricting market participants to those who have the ability and incentive to assess and manage risk.