Trust as an entry barrier: Evidence from FinTech adoption

This paper studies the role of trust in incumbent lenders (banks) as an entry barrier to emerging FinTech lenders in credit markets. The empirical setting exploits the outbreak of the Wells Fargo scandal as a negative shock to borrowers’ trust in banks. Using a difference-in-differences framework, I find that increased exposure to the Wells Fargo scandal leads to an increase in the probability of borrowers using FinTech as mortgage originators. Utilizing political affiliation to proxy for the magnitude of trust erosion in banks in a triple-differences specification, I find that, conditional on the same exposure to the scandal, a county experiencing a greater erosion of trust has a larger increase in FinTech share relative to a county experiencing less of an erosion of trust. Estimating treatment effect heterogeneity using generic machine learning inference suggests that borrowers with the greatest decrease in trust in banks and the greatest increase in FinTech adoption have similar characteristics.