CFDP 2262R

Open Banking: Credit Market Competition When Borrowers Own the Data

Publication Date: November 2020

Revision Date: March 2022

Pages: 58

Abstract: 

Open banking facilitates data sharing consented to by customers who generate the data, with the regulatory goal of promoting competition between traditional banks and challenger fintech entrants. We study lending market competition when sharing banks’ customer transaction data enables better borrower screening. Open banking can make the entire financial industry better off yet leave all borrowers worse off, even if borrowers have the control of whether to share their banking data. We highlight the importance of the equilibrium credit quality inference from borrowers’ endogenous sign-up decisions. We also study extensions with fintech affinities and data sharing on borrower preferences.

Keywords: Open banking, Data sharing, Banking competition, Digital economy, Winner's curse, Privacy

JEL Classification Codes: G21, L13, L52, O33, O36