From advantage to disadvantage: how FinTech impacts small banks?

Abstract The recent development of FinTech has raised concerns about the unique role of small banks in the small business lending market; therefore, this study investigates how FinTech affects small banks, focusing on their comparative advantage in the small business lending market. Our results suggest that FinTech development, either from BigTech firms or big banks’ adoption of technology, negatively affects small banks and decreases their small business loans and unsecured credit loans. Our mechanism analyses show that the technological advantages of BigTech firms and big banks facilitate their credit supply to small- and medium-sized enterprises and reduce SMEs’ demand from small banks, challenging the soft information-based business models employed by small banks. Conversely, small banks with superior technological capabilities and a longer local presence are less affected. Overall, our findings highlight the negative effect of FinTech development on the small bank advantage.