Fintech Lending and Sales Manipulation

Fintech payment companies acting as lenders possess a potential solution to weak debt enforcement. Their location in the payment chain yields them a senior position in the revenue stream of the borrowing merchant, as the payment company can deduct part of the merchant's sales it processes to amortize the loan. Our analysis of the transactions processed through a fintech company offering such sales-linked loans suggests that some borrowers discontinuously reduce sales processed through the company immediately after the loan disbursal to strategically default. We find that competition from other lenders and cash limits the effectiveness of this enforcement technology.