Fintech Competition and Banks’ Shrinking Margins in Brazil

The rise of fintech lenders has intensified competition in the banking industry. This study utilizes Brazilian bank-level data to examine the causal impact of increased competition on commercial banks’ lending rates and profitability. Employing a bank-specific Bartik exposure, constructed from comprehensive credit and balance sheet information across all Brazilian banks and fintech lenders, the analysis reveals that commercial banks sustained their loan portfolios primarily by lowering lending rates. Specifically, a one standard deviation increase in fintech competition exposure corresponds to a 3.7 percentage point reduction in average lending rates at commercial banks. Banks’ operational efficiency increased due to heightened competition, but their net interest margins narrowed, adversely affecting overall profitability. Between 2018 and 2024, fintech competition is estimated to have lowered banks’ average lending rates by 2.7 percentage points and reduced traditional banks' net interest margins by 0.9 percentage points.