Hryckiewicz, Aneta; Korosteleva, Julia; Kozlowski, Lukasz; Rzepka, Malwina; Wang, Ruomeng; (2022) Bank financial innovation and SMEs lending: do we experience a transformation in a bank-SME relationship?

Abstract

While sparked by financial technology firms, the digitalisation trend has also impacted a banking sector, providing greater incentives for traditional banks to become more financially inclusive. The advancements in financial technology development might create new financing opportunities for Small and Medium-sized enterprises (SMEs), which have typically been underserved by the traditional banks. In our paper we raise a question whether the technological advances have increased the interest of banks toward the SMEs lending. Using a sample of 179,921 SMEs, merged with the data from 54 largest European banks over the period of 2008-2019 at a firm level, we analyze the impact of bank digitalisation on the SMEs access to credit and its cost. Our results indicate that bank digitalisation has positively affected SMEs’ access to bank credit, though the effect is stronger for short-term lending rather than long-term one. However, our evidence also suggests that bank digitalisation increases the cost of credit to SMEs, though the effect is non-linear. Finally, we also show that the impact of financial innovation at banks manifest via different channels, and it is also conditional on credit market characteristics.