“Our findings suggest that future policies and regulations of nonbanks should consider the effect of market shares on service quality. Our findings echo [a similar 2016 study] in that the non-traditional part of the financial sector has the potential to improve the efficiency of the financial system,” the co-authors said.
That comes in spite of nonbanks typically generating more complaints. “Despite the fact that nonbanks have a higher complaint ratio than traditional banks on average, we find that nonbanks significantly improve their service quality as their market share increases, contributing to the reduction in the complaint ratio at the county level,” the authors said.
In its conclusion, the co-authors explained, “For this improvement in service quality, we provide evidence consistent with two explanations. First, as nonbanks increase their market share, they develop a specialty in servicing lower-income borrowers. Second, as nonbanks increase their market share, they make more investments in technology. Moreover, as nonbanks’ market share grows, traditional banks increasingly focus on higher-income borrowers, and their complaint ratio decreases as well.”
The co-authors added. “We also find that the improvements in service quality are more likely to benefit marginalized borrowers, such as minorities, who are more likely to receive low-quality financial services.”
Nonbanks are more likely to serve riskier, less creditworthy, and lower-income borrowers. Considering that such borrowers are more likely to have difficulties in making mortgage payments, and therefore, more likely to file a complaint, previous studies have shown, the co-authors noted.
“It is not surprising that nonbanks have higher complaint ratios than traditional banks on average. These findings are also consistent with the differences in business models between nonbanks and traditional banks. It is typical for nonbanks to finance their entire originations through securitization and the originate-to-distribute model; whereas traditional banks still hold between 30% and 50% of their originations on their balance sheets. As a result, traditional banks may be more concerned with loan performance, and consequently, more incentivized to provide good services,” the researchers found.
Another factor in nonbanks providing better technology, regardless of market, is their larger size. The study found that nonbanks may have heightened incentives to invest in technology if they have a large nationwide market share because they can take advantage of the economies of scale and the marginal costs of technology investment are decreasing. “With different specifications, we consistently observe a positive and significant association between nonbanks’ market share and their demand for technology-related skills,” the co-authors explained.
