The Role of Fintech in Mitigating Information Friction in Supply Chain Finance
36 Pages Posted: 5 May 2020
Date Written: December 11, 2019
Micro, small, and medium-sized enterprises in developing countries face severe financing difficulties, especially when trying to expand internationally. “Information friction” is a significant cause of this financing gap. Recent financial technologies (fintech) can improve supply chain finance efficiency. This paper therefore proposes a conceptual and analytical framework to study how fintech can close the financing gap by reducing information friction. We classify fintech into two categories: information processing technology (Type-A) and information collecting technology (Type-B) and find that both help close the financing gap by lowering the probability of misclassification of good firms as bad. 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,” a bank’s optimal fintech investment is lower than a socially optimal level, calling for mechanisms to incentivize or complement banks’ investment in fintech.
Keywords: artificial intelligence, digitization, fintech, information friction, supply chain finance
JEL Classification: O14, O24, O31
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