The Paradox of Bank Technological Progress: Increasing Credit Access but at Higher Costs

Abstract

This chapter examines the role of banking technological innovation in reshaping credit allocation to small and medium-sized enterprises (SMEs), highlighting a critical paradox between expanded credit access and increased borrowing costs. Drawing upon classical theories of information asymmetry, relationship lending, and collateral-based financing, the chapter empirically examines how bank technological development influences banks’ lending practices within existing bank-firm relationships, particularly following the European Union’s Second Payment Services Directive (PSD2). The analysis shows that banking technology significantly alleviates collateral constraints, thereby expanding credit access along the intensive margin, with benefits concentrated in long-term lending where information asymmetries are most severe. However, contrary to conventional predictions, increased bank digitalization coincides with higher borrowing costs following PSD2 implementation. These findings highlight the conflicting effects of technology on financial intermediation, offering important insights for both researchers and policymakers navigating the rapidly changing landscape of banking digitalization.