Insights from a Dynamic Model of Open Banking

Open banking allows customers to share their financial data with third-party providers such as fintech companies, thereby increasing competition and expanding access to financial services. While this shift promises benefits such as improved product offerings and greater financial inclusion, it also introduces significant economic and policy risks. We develop a continuous-time model of competition between banks and fintech lenders using a canonical search-and-match framework with heterogeneous borrowers. The model captures how data sharing reshapes screening, pricing, and equilibrium lending outcomes. Our analysis highlights mechanisms through which open banking can level the playing field between banks and fintechs, but may also over-empower data-rich lenders, potentially reversing borrower benefits. In our dynamic framework, we characterize equilibrium interest rate distributions, borrower participation decisions, and welfare effects when borrowers decide individually whether to participate in open banking.