What’s Your Bank’s FinTech Score? Technology Integrating Banking into the Broker Intermediation Model

Abstract

We define FinTech as banks’ integration of technology into the broker intermediation model. Unlike traditional dealer banks relying on leveraged balance sheets for intermediation, FinTech banks adopt a technology-driven broker model. Using nonlinear and machine learning algorithms, we develop an empirical “FinTech score” that shows on-balance sheet lending for low-FinTech-score banks versus securitization, brokered deposits, and non-interest income for high-score banks. Using two complementary measures of operational efficiency, we find that this technology-driven shift in business models (either holistically or via mergers) helps explain reductions in the cost of financial intermediation. Our bank-specific, time-varying FinTech score provides insights into the distribution of FinTech integration into U.S. banking.