Platform lending and innovation

BISWorkingPapers No1142 Platformlendingandinnovation byLeonardoGambacorta,LeonardoMadioandBrunoMParigi MonetaryandEconomicDepartment November2023 JELclassification:G20,L86,O31. Keywords:platformlending,bigtech,onlineplatforms,credit,innovation. BISWorkingPapersarewrittenbymembersoftheMonetaryandEconomicDepartmentoftheBankforInternationalSettlements,andfromtimetotimebyothereconomists,andarepublishedbytheBank.Thepapersareonsubjectsoftopicalinterestandaretechnicalincharacter.TheviewsexpressedinthemarethoseoftheirauthorsandnotnecessarilytheviewsoftheBIS. ThispublicationisavailableontheBISwebsite(www.bis.org). ©BankforInternationalSettlements2023.Allrightsreserved.Briefexcerptsmaybereproducedortranslatedprovidedthesourceisstated. ISSN1020-0959(print) ISSN1682-7678(online) PlatformLendingandInnovation∗ LeonardoGambacorta†LeonardoMadio‡BrunoM.Parigi§ Thisversion:November2023 Weanalysetheimpactofplatformlendingoninnovationande-commerceven-dors’surplus.Theplatformgeneratesrevenuesfrombothlendingandmarketplacefees,andcanuselendingtopricediscriminatevendors,therebyleadingtohighermarketplacefeesandbelow-marketinterestrates.Prohibitionofplatformslendingmaystifleinnovation,notbecauseoflackofplatformfunding,butbecausethehighfeepolicyoftheplatformdetersbanksfromfinancinginnovators.Allowingplat-formstolendmayencourageinnovationbyprovidingaccesstosubsidisedcredit,butitcanalsoharmvendorswhodonothavefinancialneeds.Asufficientcon-ditionforplatformlendingtobewelfare-enhancingisthatinnovatorswouldnotreceivefundingfrombanksotherwise.However,ifinnovatorswouldreceivefund-ingfrombanks,platformlendingmayreducetheoverallvendorsurplus.Creamskimmingariseswhentheplatformhasbetterinformationthanthebankabouttheprospectsoftheinnovators’projects.Toaddressthepotentialnegativeeffectsofplatformlendingonvendors’surplus,wealsoexploretheimpactofdifferentregulatoryinstruments. JELCode:G20,L86,O31. Keywords:platformlending,bigtech,onlineplatforms,credit,innovation. ∗Anearlierversionofthispapercirculatedunderthetitle“PlatformLending”.Wethankparticipantsatthe3rdCefESAnnualConferenceinMilan,theIBEOWorkshopinAlghero,theBISresearchwebinar,the2023TSEDigitalConference,the2023ParisDigitalConference,andinseveralseminarsforusefulsuggestions.WealsothankEliasCarroni,EdoardoGrillo,AlexanderGuembel,FahadKhalil,YassineLefouili,LucaSandrini,NicolasSoulie,MarkTremblay,MarianneVerdier,andGuglielmoWeberfortheirhelpfulcomments.Thispaperrepresentstheviewsoftheauthors,whicharenotnecessarilytheviewsoftheHongKongMonetaryAuthority,HongKongAcademyofFinanceLimited,orHongKongInstituteforMonetaryandFinancialResearch,orthoseoftheBankforInternationalSettlements.LeonardoMadioacknowledgesfinancialsupportfromtheUnicreditFoundationandtheBISResearchFellowshipprogramme.BrunoParigiacknowledgeshospitalityandfundingfromtheHongKongInstituteforMonetaryandFinancialResearch.Theabove-mentionedentitiesexcepttheauthorstakenoresponsibilityforanyinaccuraciesoromissionscontainedinthepaper. †BankforInternationalSettlements,Centralbahnplatz2,4051Basel,Switzerland.Email: Leonardo.Gambacorta@bis.org.OtherAffiliation:CEPR. ‡DepartmentofEconomicsandManagement,UniversityofPadova,ViadelSanto,33,35123Padova,Italy.Email:leonardo.madio@unipd.it.OtherAffiliation:CESifo. §DepartmentofEconomicsandManagement,UniversityofPadova,ViadelSanto,33,35123Padova,Italy.Email:brunomaria.parigi@unipd.it.OtherAffiliation:CESifo. 1Introduction Inrecentyears,bigtechplatformshaveenteredthecreditmarketbyofferingloanstofirmssellingontheirmarketplaces.Forexample,Amazon.comprovidesselectedsmallandmedium-sizedenterpriseswithaccesstofastandcompetitivecredit.Thiscreditenablesthemtoexpandtheirbusinessonthemarketplace,coverinventorycosts,developnewproducts,andmeetadvertisingandmarketingexpenses.1Similarly,AlibabaofferscredittovendorsonTaobao,China’slargestretaile-commerceplatform.Inthispaper,wefocusontheinterplaybetweenthefinancialsideandtherealsideofaplatform’secosystemandtheimpactofplatformlendingoninnovationandvendors’surplus. Thisvendors’financingactivityisofinteresttotheplatformbecauseitmayhelpextracthigherrentsfromtransactionsonthemarketplacecomparedtoscenarioswherevendorscanrequestloansonlytobanks.Thefeescollectedonthemarketplaceandtheinterestratesofferedtoborrowersareinherentlylinkedduetothedualactivityoftheplatform.However,itisnotclearaprioriwhethertheentryofbigtechplatformsinthecreditmarketwouldhaveapositiveornegativeimpactonsocialwelfarecomparedtoanar-chitecturewhereonlybanksareinvolvedinlending,asnotallvendorshaveinvestmentopportunities. Wedevelopamodelinwhichamonopolyplatformenablestransactionsbetweencon-sumersandvendors,whichweinterpretassmallandmedium-sizedenterprises.Ourmodelcapturesinasimplifiedmannerthetwomainactivitiesofaplatform’secosystemweareinterestedin:themarketplaceandcredit.2Vendorsareoftwoprivate-informationtypes:(i)“non-innovative”vendorswithnogrowthopportunities,and(ii)“innovative”vendorswhohavethepotentialtoexpandtheirbusinessthroughafixed-sizeinvestmentthatrequiresexternalfinancingintheformofaloan.Theou