We provide a spatial framework to study competition between banks and fintechs in the lending market and examine the impact on investment and welfare. Based on the key differences between banks and fintechs, we derive results consistent with the empirical evidence available. We find that fintechs with inferior monitoring efficiency can successfully enter because of their superior flexibility in pricing and that higher bank concentration leads to higher fintech loan volume. If fintechs and banks have similar funding costs, fintech borrowers pay lower loan rates and have higher default rates than bank borrowers with similar characteristics; however, the result will flip if fintechs have much higher funding costs than banks. The advantage of fintechs in offering convenience can also induce them to charge higher loan rates than banks. Fintech entry will improve welfare if fintechs have high monitoring efficiency and inter-fintech competition intensity is intermediate. Fintech entry may induce banks’ exit and reduce investment; however, it will increase investment if inter-fintech competition is intense enough.

This paper investigates the effects of relative performance concerns on fund managers’ behavior when managers are heterogeneous in their risk management practices. We find that relative performance concerns have distinct effects on different managers as follows: managers without risk management constraints conduct risk management, while those with risk management constraints do not change their trading. Our results suggest that a small number of fund managers with risk management requirements can have a significant impact on the market. Our theory can potentially reconcile the long-lasting debate regarding the impact of risk management on financial markets.