FinTech Disruption, Payment Data, and Bank Information

We study the impact of FinTech competition on a monopolist bank that bundles payment processing and lending. In our model, consumers' payment data contain information about their credit quality. This information is valuable to the bank when making loans. Surprisingly, under mild conditions, consumers in the loan market also benefit ex ante from the bank being informed. The bank internalizes the value of this information when pricing its payment services, as do consumers when choosing a payment processor. Competition from FinTech firms specializing in payment services disrupts this information spillover to lending decisions. We show that FinTech competition can reduce or increase the price of payment services charged by banks. Overall consumer welfare depends on the consumer's affinity for bank services. Those with a high affinity may be worse off, whereas those with a low affinity benefit from cheaper access to payment services. Policies that give consumers complete control of their payment data break the bank's vertical integration of payment and lending, but such policies can also harm consumers. Our results highlight the complex consequences of recent regulation such as PSD2 in the EU and the Open Banking initiative in the UK, especially their heterogeneous impact on consumers.