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| Fintech, Optimal Banking Market Structure, and Credit Supply for SMEs |
| SHENG Tianxiang, FAN Conglai
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| College of Finance, Nanjing Agricultural University;Yangtze River Delta Economics and Social Development Research Center, Nanjing University |
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Abstract Small and micro enterprises (SMEs) play an important role in China's economic development, and their financing problems are thus of great concern to Chinese society. However, the lack of banks' supply of credit to SMEs has never been fundamentally resolved. In recent years, financial technology (Fintech) has deeply affected the financial sector. Fintech is expected to drive the supply of credit to SMEs in commercial banks.
Only by understanding the influence of Fintech on the banks' supply of credit to SMEs can we guarantee that it best serves both SMEs and the banks' credit business. Such an analysis can be carried out based on the well-established credit theory of SMEs. This theory emphasizes two perspectives: lending technology and banking market structure. The application of Fintech is likely to have a major impact on these two perspectives.
This paper accordingly distinguishes between traditional and Fintech lending technology, constructs a theoretical model of banking market structure, and analyzes the relationships between Fintech, banking market structure, and banks' supply of credit to SMEs. It creates a provincial Fintech development level index by manually collecting Baidu search index data and uses provincial panel data from 2011 to 2018 to conduct empirical tests of its theoretical hypotheses.
The results are as follows. (1) Fintech has changed lending technology, and it promotes banks' supply of credit to SMEs from the perspective of the entire banking system. (2) There is an inverted U-shaped relationship between banking market structure and banks' supply of credit to SMEs, which proves that there exists an optimal banking market structure that can promote the maximum credit supply to SMEs. (3) The development level of Fintech regulates the optimal banking market structure. That is, the higher the level of Fintech development, the higher the optimal degree of competition in the banking industry, which promotes credit supply to SMEs.
These results have three consequences for banks' supply of credit to SMEs. First, Fintech is important for promoting the entire banking system's supply of credit to SMEs. To increase the application of Fintech in the future, banks of all sizes should pay attention to the micro basis for the effectiveness of Fintech. Second, as the development of Fintech accelerates, we need to pay attention to the banking market structure, as the two must work together. Third, the effectiveness of Fintech depends on the credit environment for commercial banks and SMEs. Government departments, banking institutions, and SMEs should work together to improve the external market environment.
The contributions of this paper are threefold. First, the literature on Fintech and banks' supply of credit to SMEs focuses on theoretical and normative analysis, and the measurement of Fintech remains difficult. This paper establishes the Fintech development level index using the Baidu search index, which is more relevant to the banks' supply of credit to SMEs. The empirical test supplements the evidence on the current state of affairs in China.
Second, prior research rarely integrates the two perspectives of lending technology and banking market structure and does not consider whether there is a correlation between the impact of changes in lending technology driven by Fintech and of changes in banking market structure. This paper studies the impact of Fintech on the optimal banking market structure and thus enriches theories about banks' supply of credit to SMEs.
Third, in the past, the impact of banking market structure was mainly tested at the individual level of SMEs. This paper analyzes the entire banking system's supply of credit to SMEs using provincial panel data. It complements research based on micro-level data and is more conducive to analyzing the impact of banking market structure.
This paper has some shortcomings. Risk management is an important element of banks' supply of credit to SMEs. However, it cannot be directly quantified and analyzed due to limitations of theoretical analysis and data availability. Future research should explore this area.
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Received: 26 August 2019
Published: 02 July 2020
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