Working Paper: NBER ID: w28118
Authors: Zhiguo He; Jing Huang; Jidong Zhou
Abstract: Open banking facilitates data sharing consented by customers who generate the data, with a regulatory goal of promoting competition between traditional banks and challenger fintech entrants. We study lending market competition when sharing banks' customer data enables better borrower screening or targeting by fintech lenders. Open banking could make the entire financial industry better off yet leave all borrowers worse off, even if borrowers could choose whether to share their data. We highlight the importance of equilibrium credit quality inference from borrowers' endogenous sign-up decisions. When data sharing triggers privacy concerns by facilitating exploitative targeted loans, the equilibrium sign-up population can grow with the degree of privacy concerns.
Keywords: open banking; credit market competition; borrower data ownership
JEL Codes: D18; G21; L13; L15; L51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| open banking (G21) | improved screening ability (C52) |
| improved screening ability (C52) | greater competition in lending (G21) |
| greater competition in lending (G21) | worse borrower welfare (G51) |
| borrower signup decisions (G51) | market outcomes (P42) |
| privacy concerns (K24) | borrower signup decisions (G51) |
| borrower data sharing (G51) | targeted loans for high-quality borrowers (G51) |
| borrower data sharing (G51) | worse loan offers (G51) |