Does IT Help? Information Technology in Banking and Entrepreneurship

Information technology (IT) has dramatically changed how information is used in the financial sector. This may affect the supply of credit from banks, as a key function of banks is to screen and monitor borrowers. Lending to opaque borrowers, such as young firms and start-ups, is likely to be especially sensitive to such changes in IT. The reason is that young firms have not yet produced sufficient quantitative information, such as balance sheet data. Instead, lenders rely on soft information. As start-ups contribute disproportionately to job creation and productivity but are often financially constrained, understanding how the IT revolution in banking has affected start-ups’ access to finance is of paramount importance. Yet, direct evidence for the impact of lenders’ IT capabilities on entrepreneurship is scarce.

This paper by the BIS relates to the literature investigating the effects of IT in the financial sector on credit provision and small businesses. Second, the authors speak to papers that analyse the importance of collateral for entrepreneurial activity. BIS provides the first evidence that banks’ IT adoption increases the importance of collateral in banks’ financing of young firms. Third, the paper contributes to the recent literature that investigates how the rise of fintech affects credit-scoring and credit supply. An advantage of focusing on the variation in IT adoption among banks is that our results are unlikely to be explained by regulatory arbitrage, which has been shown to be an important driver of the growth of fintechs.