Events

Prof. Yunzhi Hu
Assistant Professor of Finance
The University of North Carolina at Chapel Hill

We study competition and collaboration between a bank and a fintech firm in a market plagued by adverse selection. The bank has cheaper funding, whereas the fintech firm has better screen-ing technology. Our innovation is to allow the bank to lend to the fintech, i.e., to finance its competitors. This partnership funding arrangement lowers the fintech’s funding costs and re-duces the bank’s incentive to compete. We show that two lenders collaborate when the average quality of the borrower pool is low but compete when the quality gets high. While the fintech always benefits from partnership funding, the bank receives more profits only when the average quality is high, at the expense of higher interest rates the borrowers face.