Abstract
Micro, small and medium enterprises (MSMEs) in developing countries face severe financing difficulties, especially when trying to grow their businesses internationally. One significant cause of this financing gap is informational friction. Various supply chain finance products and solutions are introduced to mitigate such frictions by leveraging on information from the extended supply chain of the borrower. The recent development in FinTech, which is closely related to information technologies, has offered new opportunities to further improve the efficiency of supply chain finance. In this paper, we propose a conceptual and analytical framework to study how FinTech can close the financing gap by reducing information friction. Under this framework, we classify various types of FinTech into two categories: information processing technology and information collecting technology. The former one (denoted as Type-A), including analytics and artificial intelligence, allows financial institutions to efficiently process and transform raw data into useful information (signals) that can directly guide the decision-making process. The latter one (denoted as Type-B), including blockchain, biometrics and identity management, and digitalization, allows financial institutions to collect additional and accurate data/information to be processed in the decision-making process. Using this framework, we find that both types of FinTech help closing the financing gap by lowering the probability that a good firm is mis-classified as a bad one. The two types of FinTech can be complements or substitutes. Banks' optimal Type-A investment increases in the bank's size, profit margin, and the fraction of good firms in the market. They invest in Type-B if and only if the investment is sufficiently small. Due to double marginalization, the bank's optimal FinTech investment level is lower than the socially optimal level. This calls for additional mechanisms that simulate or complement banks' investment in FinTech.
Highlights
Micro, small, and medium-sized enterprises (MSMEs) in developing countries rely on external finance to sustain operations and grow domestically and internationally
We focus on supply chain finance products that are based on open account, particular finance of receivables and purchase order finance
Under the model proposed in the previous section, this section focuses on examining the impact of given levels of fintech investment on the financing gap, which we define as the fraction of firms who should receive financing but failed to do so
Summary
Small, and medium-sized enterprises (MSMEs) in developing countries rely on external finance to sustain operations and grow domestically and internationally. A Taobao or TMall (subsidiaries of Alibaba group) seller can initiate a loan request through MyBank.cn (a subsidiary of Ant Financial Services Group), which will in turn collect this seller’s business history from Taobao or TMall, and process this information before making a lending decision Another example is the fintech lender Kabbage, which provides a rapid lending product for small business in the United States (US) and the United Kingdom by assessing the risk of small business using the business borrowers’ operational and financial data, including Amazon and eBay trade information, PayPal transactions, and UPS shipment volume, and so on.. The latter (Type-B), includes blockchain, biometrics and identity management, and digitization, and allows more data and information to be collected in decision-making.4 We find that both types help close financing gaps by offering a more accurate signal to identify the good firms that deserve loans.
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