Birds of a feather flock together: the coupling of innovative banks and innovative firms

Financial technology (Fintech) innovation in banking has the potential to improve banks' screening and monitoring abilities, especially for more opaque firms, thereby improving their portfolio and risk allocation. We test the impact of Fintech innovation in borrower monitoring on banks' supply of credit to Italian firms, with a special focus on small innovative businesses. To this end, we use Credit Register data on outstanding loans for Italy at the bank-firm level, combined with information on bank Fintech innovation from the Bank of Italy's Regional Bank Lending Survey, and the classification of innovative young firms under the Italian Start-up Act. We find that banks investing in Fintech-based monitoring technologies provide larger volumes of credit to innovative firms at lower interest rates. Moreover, firms borrowing from these banks seem to benefit from stronger relationships, as they are less likely to exit the credit market. Finally, we find no evidence that Fintech innovation in monitoring increases the likelihood of loans to innovative firms becoming non-performing.