Platform lending and innovation

BIS Working Papers  |  No 1142  | 
07 November 2023



In recent years, large technology companies (big techs) operating on platforms have ventured into loan provision. The vendors' financing activity is of interest to the platform as it allows it to potentially extract higher rents from transactions than traditional banks. However, as fees collected on the marketplace and the interest rate offered to borrowers are inherently related, and not all vendors have investment opportunities, it is not clear whether the entry of big tech platforms into the credit market has a positive or negative effect on the economy relative to a situation where only banks provide loans.


We consider the activities of an online platform that operates an e-commerce marketplace, charging a fee on transactions to all vendors, while also offering loans to vendors who need to invest in output-enhancing innovation. Using a game-theoretical model, we investigate: (i) how platform lending affects the relationship between the marketplace fee and the interest rate offered to borrowers, compared to a scenario where only banks provide loans; (ii) whether and under what conditions platform lending spurs or hinders investments in innovation and business expansion, and its effect on social welfare; (iii) how the lending incentives of a platform change when it possesses better information than banks about  the repayment probability of borrowers.


We find that: (i) platform lending serves as an instrument to price discriminate vendors with heterogenous funding needs, resulting in higher fees and below-market interest rates; (ii) platform lending can spur innovation by providing access to subsidized credit, but may be detrimental to vendors who do not borrow; and (iii) when the platform has better information it will lend only to the highest-quality vendors and at a better rate than banks, which, anticipating adverse selection effects, will not lend. Our findings suggest that platform lending can be socially desirable if the users would not have received funding from banks, but it has ambiguous effects otherwise.


We analyse the impact of platform lending on innovation and e-commerce vendors' surplus. The platform generates revenues from both lending and marketplace fees, and can use lending to price discriminate vendors, thereby leading to higher marketplace fees and below-market interest rates. While platform lending can encourage innovation by providing access to subsidised credit, it can harm vendors who do not have financial needs. A sufficient condition for platform lending to be welfare-enhancing is that innovators would not receive funding from banks otherwise. However, if innovators would receive funding from banks, platform lending may reduce the overall vendor surplus. Cream skimming arises when the platform has better information than the bank about the prospects of the innovators' projects. To address the potential negative effects of platform lending on vendors' surplus, we also explore the impact of different regulatory instruments.

JEL classification: G20, L86, O31

Keywords : platform lending, big tech, online platforms, credit, innovation