The Effects of Fintech Prepaid Services on Competition and Stability in Banking

This paper theoretically examines the impacts of the asymmetric expansion of the Fintech-based prepaid services (e.g. Alipay, Cashbee, Payco) on competition and stability in the banking sector. Specifically, Fintech prepaid services can substitute bank deposits in retail payments service but is less likely to penetrate into loan service. Our model focuses on such asymmetric competition pressure from the entry of Fintech firms on the banks’ operations. We find that if the expansion of Fintech prepaid services concentrate on the deposit market but not on the loan provision, then banks are likely to take more risky loans. Our finding is interesting because our result in the risky loan is the same as what Allen and Gale (2000) finds, even though our model is based on Boyd and De Nicolo (2006) which has the opposite finding. The reason is due to the introduction of asymmetric competition environment into Boyd and De Nicolo (2006). On the contrary, if the competition becomes symmetric in both deposit and loan market by allowing equally enhanced competition into the loan market, the Fintech’s entry will possibly enhance financial stability by making banks taking less risky loan. The supervisory authorities need to take this point into account when they make their policies.