Investing in Lending Technology: IT Spending in Banking

Banks’ lending technology hinges on their handling of soft and hard information in dealing with different types of credit demand. Through assembling a novel data set on banks’ investment in information technologies (IT), this paper provides concrete empirical evidence on how banks adapt their lending technologies. We find investment in communication IT is associated with improving banks’ ability to produce and transmit soft information, whereas investment in software IT helps enhance banks’ hard information processing capacity. We exploit policies that affect geographic regions differentially to show causally that banks respond to an increased demand for small business credit (mortgage refinance) by increasing their spending on communication (software) IT spending. We also find that the entry of fintech induces commercial banks to increase their investment in IT—more so in the software IT category.

This paper was accepted by Bo Becker, finance.

Funding: Z. He acknowledges financial support from the John E. Jeuck Endowment at the University of Chicago Booth School of Business, as most of the work was done while he worked at the University of Chicago.

Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2024.04608.