The real effects of FinTech lending on SMEs

Despite the attention that FinTech has received over the past years, the drivers and consequences of FinTech disruptive forces on financial markets remain open to debate. For example, an important open question relates to the impact that FinTech lending availability has on SMEs financing and investment policies. This paper addresses this question using a unique data set from a FinTech platform containing the universe of loan applications.

The paper finds that FinTech serves larger, high profitability SMEs, who already have access to bank credit. At the same time, firms who access FinTech lending have lower interest coverage ratios, less unused debt, and less availability of collateral. Therefore, these firms may switch to FinTech to finance their growth without depleting their debt capacity. Finally, firms who access the FinTech platform have relationships with banks with less liquid assets, stable funds, and capital, suggestive of a desire to reduce exposure to lower quality banks.

To study the real effects of obtaining FinTech debt, the paper restricts the analysis to firms who apply to the FinTech platform, thus comparing accepted versus rejected applicants. The paper finds that firms increase assets, employment and sales following FinTech lending. Also, firms increase leverage, both short-term and long-term, while reducing the proportion of secured debt. Excluding FinTech loans, the increase in leverage is associated with a decrease in long-term bank debt, and an increase short-term bank debt. Finally, access to the FinTech platform allows SMEs to diversify their pool of lenders. Firms add new bank relationships and reduce their dependence on a single bank.

Overall, the findings suggest that FinTech lending allows firms to grow by expanding their debt capacity, and at the same time preserve financial flexibility and reduce their exposure to banking shocks.

Click here to go to the paper by Afonso Eça, Miguel Ferreira, Melissa Prado, and Emanuele Rizzo.