Exploiting Digitalization Breakthrough Role To Enhance the Relationship Between Lenders And Small Firms

Digitalization is transforming the financial sector, enabling intermediaries to efficiently offer their services and access more information from companies. Specifically, digitalization provides easy access to "hard" and standardized information, but it remains challenging to digitize "soft" information, which relies on face-to-face interactions. This challenge is especially pronounced for small and medium-sized enterprises (SMEs), where the need for human proximity is crucial due to their asymmetric information issues. Our study aims to investigate whether the adoption of new digital banking technologies by SMEs affects the role of personal contacts between lenders and entrepreneurs, ultimately reducing information asymmetry problems for SMEs. Our research question is: Does digitalization moderate the impact of the physical proximity of banks to small firms on their financial decisions? To address this question, we conducted a quantitative analysis using a sample of Italian SMEs operating in non-financial sectors from 2011 to 2020. We utilized an unbalanced panel dataset obtained from the Orbis database and employed the two-stage least-squares (2SLS) technique with instrumental variables (IVs), along with cluster-robust standard errors to account for endogeneity concerns. Our findings indicate that when personal interactions between lenders and small entrepreneurs are minimal, the relationship relies predominantly on digital channels, resulting in lower availability of soft information and reduced levels of indebtedness for small firms. In contrast, when the interaction between banks and SMEs is face-to-face, there is a higher level of available soft information, allowing firms to secure more financial debt. From a managerial perspective, our research underscores the significance of the proximity between banks and SMEs, even in a digitalized environment. It emphasizes the need to strike a balance between digital technologies and human interactions in financial services. In a "phygital" future, the benefits of physical proximity can complement the evolving concept of digitalization, which should be harnessed to gather essential soft information crucial for lending decisions.