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 dataset on banks’ investment in information technologies (IT), this paper provides concrete empirical evidence on how banks adapt their lending technologies. We find invest ment in communication IT is associated with improving banks’ ability to produce and transmit soft information, while 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.